Crypto is becoming a larger part of everyday life, which means it might be time to pay attention to these ever-growing digital assets. The good news is that we’re no longer living in the complete lawless Wild West of crypto.
There are now crypto regulations in Canada that protect you while you’re buying, selling, and trading.
As cryptocurrency is still in its infancy, there will be a lot of work needed to be done before many consumers will be able to trust this new asset class.
Let’s take a look at crypto regulations in Canada and what this means for investors like you.
Simply put, cryptocurrency is regulated as a security in Canada. This means that cryptocurrencies are subject to securities laws.
ETFs, shares, stocks, bonds, hedge fund investments, options, and futures are examples of tradable financial assets. Many people buy them with the expectation of seeing their value rise.
So you understand what “securities” are, but you’re not sure how they’re governed. That’s not a problem; that’s exactly what we’ll be discussing here. But first, let’s take a look at the context and history of cryptocurrency in Canada.
Before we get into the technicalities of Bitcoin law in Canada, keep in mind that cryptocurrency is not recognized as legal tender.
Only notes and coins issued by the Bank of Canada and the Royal Canadian Mint Act are the sole legal money in Canada.
This means that the government nor any central agency supports cryptocurrencies.
It also means that digital currency is not supervised by banks, credit unions, or other financial institutions.
Throughout the short history of cryptocurrencies, Canada has been a trailblazer in terms of acceptability and regulation. Canada was the first country in the world to pass anti-money laundering regulations for cryptocurrency service providers.
The government started by implementing provincial security rules that were initially geared for money service enterprises to cryptocurrencies.
Cryptocurrencies have been taxed in Canada since 2013. (more on this later).
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act of 2014 included a reference to cryptocurrencies. This was thought to be the first national law addressing digital currency.
The rule applies not only to Canadian-based exchanges but to any exchange that “directs services” to Canadians.
It’s also worth noting that the British Columbia Securities Commission registered the first cryptocurrency-only investment fund in 2017.
In addition, the Canadian Securities Administration (SCA) officially announced in 2017 that cryptocurrencies were regulated under the then-current securities laws. This was obtained through CSA Staff Notice 46-307 Cryptocurrency Offerings.
The Bank of Canada, R3, and Payments Canada collaborated on the project, which is known as Project Jasper. It is still ongoing and is currently in Phase 4, which includes the Bank of England and the Singapore Monetary Authority.
The cooperation has been working on developing a cross-currency and cross-border settlement mechanism for the past two years.
When an ICO is classified as a security, it must adhere to all security law standards. Most essential, the company that is launching the ICO may be able to meet the business criteria. If this is the case, it must register as a dealer.
It is common knowledge that mining digital currencies consume a significant amount of electricity.
The Canadian government has not imposed any restrictions on it in general. However, in Quebec, Hydro-Quebec has set a restriction of 300 megawatts for miners.
Other energy companies, according to experts, may follow similarly. They also don’t rule out the possibility that provinces will register as well.
The regulations for initial coin or token offers are also outlined in CSA Staff Notice 46-307 Cryptocurrency Offerings.
It explains how to determine whether an ICO (initial coin offering) is a security or a software product, and it emphasizes the importance of “content over form.”
In the end, the CSA determines whether or not an ICO involves securities on a case-by-case basis.
Consider the following example of an ICO that does not involve securities: An ICO is an initial coin offering in which the value of the currency is determined by the company’s future success or profitability.
By comparison, an ICO sells coins in exchange for access to a gaming site. This would not necessitate the use of securities.
The CSA determined that the majority of tokens were securities at the time of publishing this notice. As a result, most ICOs will be classified as securities, with some exceptions, which we’ll discuss in a bit.
Other laws exist even when cryptocurrencies are not considered securities, such as in the case of ICOs that allow holders to participate in a game. Consumer protection laws, which vary by province, are the most essential rules.
A right to cancel, misrepresentation, unfair business practices, and unsolicited goods are some of the requirements listed in these consumer protection regulations.
Cryptocurrency exchanges are subject to the same restrictions as businesses in the money service industry in Canada. This includes the same due diligence, reporting, verification, and record-keeping requirements.
Every bitcoin exchange in Canada must register with FinTRAC as of June 2021. (the Financial Transactions and Reports Analysis Centre of Canada).
It must also adhere to any market valuation and margin restrictions that may be in place. The deadline for compliance was set for June 2020, giving exchanges a year to prepare.
Virtual Currency Travel Rule in Canada
In February 2020, the Virtual Currency Travel Rule entered into effect. All money service organizations and financial institutions are required to keep track of cross-border bitcoin transactions under this rule.
It also wants them to follow the same procedure for any cross-border electronic funds transfers.
This rule essentially states that all cross-border cryptocurrency transactions must comply with the same due diligence and other standards as the Proceeds of Crime (Money Laundering) and Terrorist Financing Act of 2014.
This law governs reporting requirements for international monetary transactions involving Canadians and Canadian organizations, with the goal of discouraging organized criminals from laundering money abroad.
In a joint public notification from the CSA and Canada’s Investment Industry Regulatory Organization in March 2021, Canada restated its stance on cryptocurrency regulation (IIROC).
This notice also provided extra information to exchange operators in order for them to remain compliant with the country’s regulatory framework. The information is mostly targeted at businesses.
The major message for the common Canadian is that cryptocurrencies will remain regulated, and the Canadian government is enforcing those restrictions through exchanges and other venues.
As previously stated, Canada was the first country to mandate taxpayers to pay tax on cryptocurrencies in 2013. To put it another way, cryptocurrencies are taxed as either capital gains or business income, depending on how they were earned.
The CRA established a cryptocurrency unit in 2017 to ensure that Canadians who invest in cryptocurrencies pay their fair share of taxes. It also conducts crypto audits for tax purposes.
Before reporting bitcoin gains and losses on their taxes, Canadians must convert them to fiat (CAD).
The CRA does not specify a technique; however, it must be consistent and reasonable. For example, a taxpayer can convert using data from just one exchange or the average of numerous exchanges on a regular basis.
Buying a product or service using cryptocurrencies is referred to as a barter transaction.
To declare it, Canadians must convert the cryptocurrency’s value into Canadian dollars. This is usually the product’s or service’s fair market value or the price at which the vendor sells it in Canadian dollars.
When cryptocurrency revenues are taxed as company income, they are taxed in their entirety. When capital gains are taxed, only half of the profit is taxable. Taxpayers must still record all of their earnings.
The Canadian government strongly advises taxpayers to keep solid records in the official guide for bitcoin taxes.
The date of cryptocurrency transactions, as well as the value in Canadian dollars at the time of the transaction, should be included.
Keeping records is vital since Canadians are only required to declare cryptocurrency they sell, not those they buy or hold.
They do, however, require information about the cryptocurrency’s original value in order to declare it at the time of sale.
Given that some people buy and sell cryptocurrency years apart, keeping track of transactions makes the process considerably easier to handle.
Anyone who owns or plans to buy cryptocurrencies should be aware that the Canadian government regulates digital assets as securities.
It gives you a sense of security knowing that organizations who sell cryptocurrencies are held accountable.
With these regulations in place, you’ll have a pleasant experience buying, selling, and trading your favourite digital assets.