Canada implements flexible regulation on the crypto industry, attracting a large number of international players?

Digital currencies are quickly becoming mainstream in Canada’s financial sector. In addition to increasing adoption, Canada has also successfully created a stable regulatory environment.

In 2014, the Canadian Parliament became the first government in the world to pass national laws on digital currencies, establishing Canada as a leader in the global digital asset sector.

Since then, Canadian regulators have been fairly proactive toward cryptocurrencies, taking a cautious yet optimistic stance in an attempt to promote innovation while protecting investor interests.

01
Regulatory support for digital asset innovation

Canada’s supportive environment for cryptocurrencies is reflected in some of the options it offers to startups experimenting with digital asset technology, compared to other international jurisdictions that have implemented stricter policies or have a more laissez-faire attitude.

For example, the Canadian Security Association’s (CSA) Sandbox Program supports financial technology businesses seeking to offer innovative products by carefully examining business models in a live testing environment.

Similarly, the Ontario Securities Commission (OSC), Canada’s largest securities regulator, has initiated collaboration with financial services firms to align regulation with digital innovation and encourage the development of products, services, and applications that meet the compliance standards required by securities laws.

In addition to providing the above services, Canadian regulators have also issued extensive and comprehensive guidance to innovators who want to work directly with financial authorities in the context of their specific business models, within the legal framework that applies to them.

02
Disagreement over digital asset regulation

Since the inception of the crypto industry, the demand for regulation has been polarized. Investors and businesses are in urgent need of compliance processes, and a regulatory framework is necessary for this.

On the other hand, an over-regulated economy could isolate Canada from integrating into the broader digital asset industry, forcing them to invest overseas.

So how do you strike a good balance between the two? Early advocates of blockchain believed that its unique disintermediation properties made it immune to regulation and that cryptocurrencies were created as a solution to the problem of financial markets being subject to strict public oversight.

Under this assumption, many issuers prior to mid-2017 largely ignored securities law registration requirements designed to protect investors and promote fair markets.

However, reliable legal measures are necessary to protect individual rights and are functionally integral to responsible jurisdictions. Especially in the financial sector, where individuals are extremely vulnerable to risk, regulation minimizes consumer losses and is essential to maintaining market integrity.

For example, it is now well known that businesses involved in the Canadian crypto industry must register as money services businesses (MSBs) with the Financial Exchange and Reports Analysis Centre of Canada (FINTRAC), which means that these businesses are subject to regulatory and reporting requirements.

As a result of legislative requirements, fraudulent actors are more likely to be squeezed out of the market, making room for legitimate players who can provide a higher level of investor protection.

This legitimization of the digital asset industry is the main reason why platforms welcome progressive regulation: working constructively with each other to strive for greater security and transparency without stifling an industry that is still in its infancy.

Policymakers therefore have an important role to play in developing the necessary conditions to create a framework suitable for cryptocurrencies to operate safely. CSA jurisdictions, as well as the Investment Industry Regulatory Organization of Canada (IIROC), have expressed interest in working closely with digital asset firms to understand their perspectives, consider the key risks of innovation, and ensure that investor protection is not compromised.

Regulation of this magnitude cannot be rushed, and regulators have considered several factors to ensure that any new legislation will only encourage the digital asset industry to thrive. Allowing Canada to operate as a successful cryptocurrency venue while protecting investment security and preventing fraud are some of the key elements of the proposed regulatory framework.

The regulatory sweet spot lies somewhere in between — strict enough to protect investments and fraud, but firm enough to allow private and international digital asset companies to flourish.

03
Canadian regulatory trends in 2021

In terms of the integration of cryptocurrencies with traditional investments, Canada approved Bitcoin (BTC) and Ethereum (ETH) platform funds in 2021, giving more mainstream investors the opportunity to have digital asset exposure through their investment accounts, including tax-advantaged registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

Canada has also surpassed the United States by allowing digital asset exchange-traded funds (ETFs). In February, Purpose Financial LP’s Bitcoin ETF accumulated more than $400 million in assets in its first two days of listing and broke the $1 billion mark within two months of listing.

As the investment portfolio grows, there are concerns that tax-related issues may arise. However, the Canadian tax authorities are quite clear on tax issues and provide ample guidance to investors during the process. Currently, Canada's tax laws and rules, including the Income Tax Act, also apply to cryptocurrencies.

The Canada Revenue Agency defines cryptocurrency as a commodity and says that using cryptocurrency to pay for goods or services should be treated as a barter. Since cryptocurrency is treated as a commodity, it prevents adverse misreporting of taxes.

However, the landscape is constantly changing, so regulators must stay ahead of the curve to avoid cryptocurrency enthusiasts looking to the U.S., Europe or Asia as alternative playgrounds, draining Canadian talent and investment.

04
Current Situation of Mining Industry in Canada

Canada has always been attractive to mining due to climate, electricity supply and lighting regulations. The hardware used by cryptocurrency miners generates a lot of heat and needs to be cooled to prevent overheating, and being in a relatively cool climate like Canada helps reduce the cost of cooling the computers.

In addition, Quebec has one of the lowest electricity prices in North America, at around $0.05 per kilowatt-hour for industrial consumers, and energy consumption is a major cost for cryptocurrency miners and a reason they are attracted to Canada in the first place.

Finally, Canadian digital asset companies can not only provide exchange services, but also own and operate crypto mining facilities. Canada allows miners to operate within a relaxed framework, putting Canada at the forefront of the digital currency revolution.

In the long run, people have confidence in sustainable development, and while the traditional financial industry relies on carbon-based energy, digital assets are moving easily towards green energy. This is further confirmed by Square’s report on the Bitcoin Clean Energy Initiative.

The Bitcoin Clean Energy Initiative is a unique energy model that could make the installation and capacity of solar and wind power generation more sustainable. Canada is a global leader in renewable energy, and a flexible regulatory framework around cryptocurrencies could mean an influx of international players into the “True North.”

05
What is the future of cryptocurrency regulation?

Because the digital asset space is internet-based, fintech platforms can be established anywhere in the world. The globalization of the financial industry means that Canada cannot simply wait for a regulatory framework to emerge, or it will fall behind in the innovation race.

Regulators have a responsibility to encourage digital asset investment and project development in the country. Familiarizing the Canadian market with digital asset exchanges by introducing more crypto asset platforms is a solid first step, and the industry will introduce more regulation in the next decade.

Digital asset companies will move to where they are welcomed, and thus countries that drive these actions will be better positioned to benefit from the digital asset industry.