Digital currencies are fast becoming mainstream in the Canadian financial landscape. Alongside this increased adoption, Canada has been relatively successful in creating a stable regulatory environment. Canada established itself as a leader in the global digital asset space in 2014 when the Canadian Parliament became the first government in the world to pass national digital currency law. Since then, Canadian regulators have remained fairly proactive in their approach to cryptocurrencies, taking a cautious but optimistic stance to encourage innovation while protecting investor interests.
Regulatory support for digital asset innovation
Particularly when compared to other international jurisdictions that either impose stricter guidelines or have a more laissez-faire attitude, Canada’s supportive environment for cryptocurrencies is reflected in some of the options offered to startups experimenting with digital asset technology.
For example, the Canadian Security Association (CSA) sandbox initiative supports financial technology (fintech) companies that want to offer innovative products by carefully examining business models in live test environments. Similarly, the Ontario Securities Commission (OSC) LaunchPad works with financial services companies to align regulation with digital innovation and to encourage the development of products, services, and applications that meet compliance standards required by securities laws.
In addition to these services, which are aimed at innovators who wish to work directly with tax authorities in the context of their specific business model, regulators have also published comprehensive but comprehensive guidance on how to navigate the applicable legal framework.
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The dichotomy of digital asset regulation
The need for regulation has polarized the crypto industry since its inception. Investors and companies are hungry for processes for which a regulatory framework is a must. On the flip side, an over-regulated economy could isolate Canadians from integration into the broader digital asset industry and force investment overseas. So what’s a good balance between the two?
Early proponents of blockchain believed that its distinctive properties of disintermediation made it impervious to regulation, arguing that cryptocurrency was created as a solution to the tight public oversight of financial markets. Under this assumption, before mid-2017, many token issuers largely ignored the registration requirements of the Securities Act to protect investors and promote fair markets.
However, reliable legal remedies are necessary to protect personal rights and are indispensable for a functionally responsible jurisdiction. Particularly in the financial sector, where individuals are extremely vulnerable to risk, regulation minimizes consumer exposure and is paramount to maintaining market integrity.
For example, it is now well established that Canadian companies that trade cryptocurrency (such as crypto exchanges) must register with the Financial Transactions and Reports Analysis Center of Canada (FINTRAC) as a money services company (MSB). Registration means that these companies are subject to regulatory oversight and reporting requirements. Because of these legal obligations, fraudulent actors are more likely to be pushed out to make room for legitimate actors who can offer a higher level of investor protection. This legitimation of the digital asset industry is primarily the reason why trading platforms welcome progressive regulation; to work together constructively to increase security and transparency without stifling an industry that is still in its infancy.
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Therefore, policy makers play an essential role in developing the conditions necessary to create an appropriate framework for the secure operation of cryptocurrencies. The CSA jurisdiction, along with the Investment Industry Regulatory Organization of Canada (IIROC), has expressed an interest in working closely with digital asset trading companies to understand their point of view, address key innovation risks, and ensure that investor protection is not compromised.
Regulations of this magnitude cannot be rushed, and regulators have considered several factors to ensure that any new legislation only encourages the boom in the digital asset industry. Enabling Canada to act as a successful crypto hub while ensuring investment security and fraud prevention are some of the key elements of the proposed regulatory framework. The sweet spot for regulation lies somewhere in between – strict enough to protect investments and fraud, and legal enough for private and international companies to thrive in digital assets.
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Canadian Regulatory Trends in 2021
When it comes to integrating crypto with traditional investments, Canada has made remarkable headway in sanctioning exchange-traded funds Bitcoin (BTC) and Ether (ETH) in 2021, giving more mainstream investors the option of their digital investment accounts, including tax-privileged registered retirement plans (RRSPs) and tax-free savings accounts (TFSAs).
Canada also outperformed the United States in allowing exchange traded funds (ETFs) for digital assets, which has set a precedent for wanting to be competitive in the sector. In February, Purpose Financial LP’s Bitcoin ETF accumulated over $ 400 million in assets under management in the first two days and exceeded the $ 1 billion mark within two months of launch.
With a growing investment portfolio, one might expect tax concerns to arise. However, the Canadian tax authorities have been fairly clear about the tax implications and have provided adequate guidance to investors. Currently, Canadian tax laws and regulations, including the Income Tax Act, also apply to cryptocurrency transactions.
The Canada Revenue Agency has characterized cryptocurrency as a commodity, stating that using cryptocurrency to pay for goods or services should be treated as an exchange. Since cryptocurrency is treated as a commodity, it has prevented unfavorable tax hoaxes. However, the landscape is constantly evolving, so regulators need to stay one step ahead to avoid crypto enthusiasts viewing the United States, Europe or Asia as alternative playgrounds and draining Canada of both its talent and investments.
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Canada remains a miners paradise ahead
Canada is the number one choice for crypto miners because of its climate, power supply, and lighting control. Hardware used by cryptocurrency miners generates a significant amount of heat and needs to be cooled to avoid overheating, and being in a relatively cool climate like Canada helps reduce the cost of cooling the computers. In addition, Quebec electricity prices are among the lowest in North America. For industrial consumers, prices are around $ 0.05 per kilowatt hour. Energy use is the main cost of cryptocurrency miners and, understandably, the main reason they are drawn to Canada.
After all, there is the potential for Canadian digital asset companies not only to offer trading, but also to own and operate crypto mining facilities. Canada offers miners from politically and financially unstable environments a safe haven to conduct operations in a relaxed atmosphere and put the country at the forefront of the digital currency revolution. Miners from formerly heavy crypto quarries like China are looking for cheap pastures with less hostile regulations and are now viewing Canada as a lucrative alternative.
In the long run, there is also a sense of sustainability, and while the traditional financial industry relies on carbon-based energy sources, digital assets are conveniently moving towards greener energy. This is also borne out by Square’s report on the Bitcoin Clean Energy Initiative – a unique energy model that could enable the installation and capacity of more sustainable methods of solar and wind generation. Canada is a world leader in renewable energy sourcing, and a flexible regulatory framework around cryptocurrency could mean an influx of international players towards “The True North”.
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What does the future hold for crypto regulation?
Since the digital asset area is internet native, fintech platforms can be set up anywhere in the world. This globalization of the financial industry means that Canada cannot simply wait for a regulatory framework to be in place or it will lag behind in the race to innovate. Regulators need to incentivize digital asset investments and project development in their country.
Introducing the Canadian market to digital asset trading through the launch of more crypto asset trading platforms is a solid first step. Much more regulation will be introduced into the sector over the next decade. Governments that are smart and forward-thinking will see an obvious opportunity to offer clear, but not overly restrictive, regulation and become a welcome place for digital asset projects.
Historically, authoritarian governments – where hostile and unstable rules result in a net negative outcome for their economies – are more likely to impose stricter measures on digital assets, which could inevitably force industry participants to move to countries like Canada, which offer relatively favorable conditions. Digital asset companies will continue to move where they are most welcome, and the countries that facilitate these moves will be much better positioned to take advantage of the digital asset industry as it continues to grow and the traditional financial world threatened.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Desiree Smith is a Canadian attorney with a passion for new technology and innovation. Fintech and blockchains are her main specialties and she is currently the director of business and legal affairs at Coinsquare, a crypto exchange based in Canada. In addition to her role at Coinsquare, Desiree also teaches a crypto course at Ryerson University that focuses on legal, governance, risk and compliance issues related to blockchain, smart contracts and cryptocurrency technologies.