Canada Crypto Regulations Primer: Legality, AML/KYC, Licensing, and the Travel Rule Requirements

Is crypto legal in Canada

It is legal to own and exchange cryptocurrencies in Canada. Canada primarily regulates cryptocurrencies under securities laws, which are enacted on a provincial and territorial basis. The Canadian Securities Administrator (CSA) harmonizes all securities laws and facilitates coordination between various provincial and territorial securities regulators. As per the CSA, if a coin or token is deemed to be a security, then businesses issuing such coins have to meet the registration, prospectus requirements, and AML/KYC requirements.

The Financial Transactions and Report Analysis Centre of Canada (FINTRAC) brings cryptocurrencies under the definition of virtual currencies. Virtual currency is defined as a digital representation of a value that can be used for payment, investment, or retail activities such as buying and selling of goods and services. The definition of virtual currencies includes blockchain-based such as bitcoins. Digital currencies used in virtual economies, such as those present in online games, are not included in this definition.

Entities dealing in virtual currencies include those entities that offer virtual currency exchange services and virtual currency transfer services. Virtual currency exchanges services include exchanging funds for virtual currency or vice versa and one virtual currency for another virtual currency.

Regulatory authorities governing crypto

The FINTRAC is Canada’s financial intelligence unit. Its mandate is to facilitate the detection, prevention, and deterrence of money laundering and the financing of terrorist activities while ensuring the protection of personal information under its control. FINTRAC is established under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

The FINTRAC has oversight over crypto-asset trading platforms (CTPs — the preferred term used by Canadian regulators for crypto exchanges), which are regulated as Money Service Businesses (MSBs) under the PCMLTFA. The FINTRAC also regulates foreign money service businesses (FMSBs).

CSA is an industry forum comprising all of Canada’s territorial and provincial securities regulators. The organization's chief goal is to collaborate on the creation and harmonization of securities regulations across Canada

Federal level registration requirements for crypto trading platforms (CTPs)

On 29 March 2021, the Investment Industry Regulatory Organization of Canada (IIROC)   along with the CSA, issued Staff Notice 21-239. The staff notice provides guidance on how securities legislation will apply to CTPs that facilitate or propose to facilitate the trading of crypto assets that are a) securities and b) crypto-asset contracts. Under the Staff Notice, those CTPs that do not immediately provide the final settlement of the crypto trade fall under the scope of crypto-asset contracts.

If the CTPs can be categorized as ‘securities’ then they have to, based on their business activities, further classify themselves into ‘Marketplace platforms’ or ‘Dealer platforms’. In order to bring their operations into compliance, CTPs should seek clarification regarding the registration process and other relevant requirements directly from their local securities regulators. Under dealer platforms buy and sell orders do not interact directly with each other and the dealer is the counterparty for every client trade. A CTP is regulated as a marketplace when it operates a market or facility.

AML/KYC requirements

MSBs are required to put in place a robust AML/KYC compliance program in line with the Canadian law on Anti-Money Laundering, Proceeds of Crime (Money Laundering), and Terrorist Financing Regulations (PCMLTFR). To implement an effective compliance program, the MSBs have to the following steps:

• Compliance officers: Appoint a compliance officer for their platform
• Enhanced due diligence: The MSBs have developed a set of written policies and procedures that give details of the enhanced measures that MSBs will take to mitigate the AML/CFT risks if their clients are identified as high risk such as politically exposed persons (PEPs)
• Ongoing monitoring: On 1 February 2021, FINTRAC released ongoing monitoring requirements under PCMLTFA for all reporting entities including MSBs. Under these requirements, MSBs have to develop a process to review the information that they have obtained about the clients with whom they have business relationships. Basically, the MSBs must first conduct client identification themselves or rely on information collected by an agent or affiliate. The MSBs should conduct transaction monitoring as soon as they enter into a business relationship with a client. Further, they must also conduct periodical monitoring based on their risk assessment of the client. 
• Beneficial ownership: Beneficial ownership refers to the natural person or persons who ultimately own a legal entity. Within the Canadian guidelines, beneficiaries have to take reasonable measures to confirm the accuracy of beneficial ownership information in the course of ongoing monitoring.
• Threshold reporting: On 1 June 2021, CSA issued guidance on reporting “Large Virtual Currency Transactions (LCVTR). As per the guidance, when the MSBs receive any transactions equivalent to $10,000 dollars or more in a single transaction, they must report it and submit an LVCTR to the FINTRAC. The LVCTR must be The LVCTR must be submitted to FINTRAC in accordance with the 24-hour rule. Under the 24-hour rule, MSBs are required to consider multiple transactions that are conducted by the same person or entity, on behalf of the same person or entity, or for the same beneficiary, as one transaction when they receive a total of $10,000 dollars or more within a consecutive 24-hour window.
• Suspicious transaction reporting: MSBs must report suspicious transactions under PCMLTFA and associated regulations by filing a suspicious transaction report (STR).In order to submit an STR to FINTRAC, MSBs will need to ensure that they have completed “the measures that enable them to establish reasonable grounds to suspect the transaction is related to the commission of an ML/TF offence.” 

Travel Rule requirements

On 1 June 2021, amendments to the Travel Rule came into force. The amendments require specific identifying information to be recorded when an electronic funds transfer (EFT) or virtual currency transfer is sent or received.

All reporting entities including MSBs have to submit an electronic funds transfer report to FINTRAC when they initiate or receive funds electronically in an international transaction. The threshold for reporting transactions is set to $10,000 or more for a single transaction or multiple small transactions that take place over a 24-hour period.

As per the 2021 amendments, identifying information includes the (a) name, address, and account or another reference number (if any) of the person or entity who requested the transfer, (b) name and address of the beneficiary, and (c) if applicable, the beneficiary’s account or other reference numbers. The FINTRAC has extended these requirements to include not just domestic MSBs and financial institutions but also foreign MSBs (and casinos with respect to EFTs).