Cryptocurrency Regulations in Canada: Past, Present, and Future
Cryptocurrency has been one of the most exciting and fast-moving innovations of the 21st century. It has led to financial success for investors around the world, but it also involves a certain level of risk. The Canadian government is working quickly toward creating a comprehensive set of crypto regulations that will protect all parties involved in the market.
The acceleration of fraud within the world of cryptocurrency parallels the growing popularity of virtual assets, including tokens like Bitcoin, non-fungible tokens (NFTs), and stablecoins. According to the Canadian Anti-Fraud Centre, cryptocurrency fraud losses totaling $75 million were reported in 2021 alone. In contrast, there was an estimated $12.6 million in reported losses from crypto investment scams between 2018 and 2020.
The state of Canadian cryptocurrency regulations remains in flux, but there have been many important decisions over the past decade. Whether you are selling, buying, or trading cryptocurrency, it's crucial to have a thorough knowledge of the current status of Canadian regulations as well as the changes that may be coming in the near future.
How Is Cryptocurrency Defined in Canada?
As is the case in the majority of countries around the globe, cryptocurrency is not legal tender in Canada. Despite this, it is still subject to some of the country's tax laws. The Canada Revenue Agency (CRA), which administers Canadian tax laws, defines cryptocurrency as any virtual asset with cryptographic protection. If you possess or hold these assets, they are not generally taxed, but there are tax implications if you dispose of them through a:
- Sale or trade
- Conversion to government-issued currency
- Purchase of goods or services
In these situations, your cryptocurrency may be subject to taxes for business income, capital gains, or goods and services.
What Cryptocurrency Regulations Are in Place in Canada?
There are significant variations in cryptocurrency regulations worldwide, as well as different levels of action on the part of governments and legislative bodies. Canada has shown active interest in establishing a set of regulations since the beginning, with some of the legislation dating back to the earliest days of the crypto market.
Early Regulatory Action
Canada is widely recognized for quickly acknowledging the potential of virtual assets and acting on the need for comprehensive cryptocurrency regulation, which far outpaced other countries. Virtual currencies were first mentioned in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in 2014, far earlier than action taken by most other national governments. This initial introduction was also significant in that it applied not only to Canada-based exchanges but rather to any exchange that directs services to Canadians.
In the following years, Canadian legislators and agencies took further steps to solidify logical and practical regulations and practices. These included important developments in 2016 and 2017:
- Tests by the Bank of Canada examining the use of Digital Depository Receipts on the blockchain to digitally represent Canadian currency, which signaled the country's interest in someday implementing digital currency on a national level
- A partnership with the Bank of England and the Monetary Authority of Singapore aimed at creating a settlement system that is both cross-currency and cross-border
- The British Columbia Securities Commission's registration of the first investment fund with only cryptocurrencies
Later, in 2019, the Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada released a "Proposed Framework for Crypto-Asset Trading Platforms," which offered further guidance and increased stability for the crypto market.
FATF Travel Rule
Another important event related to cryptocurrency in 2019 occurred outside of Canada's borders, when the Financial Action Task Force (FATF) released its Travel Rule. The FATF is a highly respected money laundering and terrorism financing watchdog, and its recommendation for a coordinated approach to combat criminal activity played an important part in the development of regulations for many countries This particular rule requires two-party identification for crypto transactions over a certain value.
In Canada, the FATF Travel Rule transformed into the Virtual Currency Travel Rule, which is overseen by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). FINTRAC is also responsible for the implementation of additional requirements for cryptocurrency exchanges, including:
- Development of a compliance program
- Observing know-your-customer (KYC) requirements
- Reporting any questionable transactions
- Maintaining records of clients
Since the introduction of these regulations, FINTRAC has put them into action. For example, they directed the Royal Canadian Mounted Police to order crypto marketplaces and trading platforms to track crypto funds and freeze wallets that they suspected of being linked to the Freedom Convoy protestors, who had raised significant funds using cryptocurrencies.
There has been global concern about the lack of standardization of crypto regulation, which is a natural byproduct of national governments acting independently and placing different levels of priority on the place of cryptocurrency within financial markets. Even within Canada, there are inconsistencies because cryptocurrencies are generally regulated under securities laws, which are enacted by provinces and territories rather than the federal government.
Over time, however, these rules have become more standardized, particularly under the encouragement of the Canadian Securities Administrators (CSA), an unofficial organization that carries great weight in the country's financial institutions. In March 2021, for example, the Ontario Securities Commission, which is the largest provincial securities regulator in Canada, directed crypto platforms that offered trading in derivatives or securities to register with the Investment Regulatory Organization of Canada. British Columbia and other provinces followed suit, and dozens of platforms have indicated their intention to register.
What Is the Future of Cryptocurrency Regulation in Canada?
Despite the comparative strength of Canada's crypto regulations, there is still a lot of work to be done. Legislators and industry leaders have identified several key areas with the potential for future action:
- There is currently no regulation of how cryptocurrency wallets and custodian chips are constructed, which makes users vulnerable to cybercrime.
- Bill C-249, which captured global interest when it was first introduced in February 2022, remains one of the most compelling pieces of crypto legislation, and there have been widespread predictions that it will entice cryptocurrency innovators to work in Canada.
- In response to the ever-decreasing interest in physical cash and the success of private currencies, the Canadian government is actively researching central bank digital currencies (CBDCs).
- At the moment, regulations within Canada are inconsistent because they are largely set by individual provinces, so there is growing support for the federal government to create and implement a more standardized set of rules throughout the country.
Although the regulatory framework for cryptocurrency in Canada is far from complete, the country has certainly made impressive advances that have made it an especially attractive market for crypto investors and innovators. Since the beginning, the Canadian government has seemed to embrace the potential of digital assets, and there is every indication that it will continue to do so for the foreseeable future.