Is cryptocurrency regulated in Canada?

Before investing in anything, it is always smart to do some research. And your research should always include regulation, so you have a better idea of how safe a specific investment is. The regulation around a particular investment will also tell you other relevant details, including how you’ll pay taxes on the investment.

Cryptocurrency is one of the newest investments, so it is natural to have questions about it. So, let’s dive into how Canada regulates cryptocurrency and what that means for investors like you.

How does Canada regulate cryptocurrency?

To put things simply, Canada regulates cryptocurrency as a security. This means that the laws for securities apply to cryptocurrencies.

Securities refer to tradable financial assets, such as ETFs, shares, stocks, bonds, hedge fund investments, options, and futures. Many buy them in hopes that they’ll increase in value.

So, you get what “securities” are, but you don’t know how they’re regulated. No worries, that’s exactly the topic we’ll dive into here. But first, let’s review crypto’s background and history in Canada.

Quick background: Cryptocurrency is not legal tender

Before getting into the specifics on Canada’s regulation of cryptocurrency, remember that crypto is not considered legal tender. The only legal tender in Canada is banknotes or coins issued by the Bank of Canada and the Royal Canadian Mint Act.

This means that the government does not support cryptocurrencies and neither does a central authority. It also means that banks, credit unions, and other financial institutions do not oversee digital currency.

Canada’s history of crypto regulation

Throughout cryptocurrency’s brief history, Canada has been one of the leaders in acceptance and regulation. Canada was the first country in the world that approved AML, or anti-money-laundering, related regulation for crypto service providers. The government began by using provincial security laws originally designed for money service businesses and applying them to cryptocurrencies as well.

Since 2013, Canada has taxed cryptocurrencies (more on this later).

In 2014, Canada mentioned cryptocurrency in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This was considered the first national law that applied to digital currencies. The law does not just apply to Canada-based exchanges; it also applies to any exchange that “directs services” to Canadians.

2017 saw the British Columbia Securities Commission register the first investment fund with only cryptocurrencies.

Also, in 2017, the Canadian Securities Administration (SCA) officially announced that the then-current securities laws regulated cryptocurrencies. This came via CSA Staff Notice 46-307 Cryptocurrency Offerings.

Canada Has Experimented with Blockchain

It is also worth noting that Canada has experimented with blockchain – or distributed ledger – technology. In 2016 and 2017, the Bank of Canada tested using Digital Depository Receipts (DDR) on the blockchain. The test tried to use the DDRs to digitally represent Canadian currency.

The project, called Project Jasper, is a combined effort between the Bank of Canada, R3, and Payments Canada. It is still in progress and currently in Phase 4, which also involves the Bank of England and the Monetary Authority of Singapore. For the past two years, the partnership has been working to create a cross-currency and cross-border settlement system.

Cryptocurrency exchange regulations in Canada

Canada applies the same regulations to cryptocurrency exchanges as it does to money service businesses. This includes requiring the same due diligence, reporting, verification, and record keeping.

As of June 2021, every cryptocurrency exchange in Canada must register with FinTRAC (the Financial Transactions and Reports Analysis Centre of Canada). It also has to comply with any requirements for market valuation and margin that are applicable. This rule was announced in June 2020, giving exchanges a year to comply.

The Virtual Currency Travel Rule

The Virtual Currency Travel Rule went into effect in February 2020. This rule applies to all money service businesses and financial institutions, and requires them to record cross-border cryptocurrency transactions. It also expects them to do the same with any cross-border electronic fund transfers.

Essentially, this rule means that any cross-border cryptocurrency transactions must meet the same due diligence and other requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act of 2014. This law regulates reporting measures for international monetary transactions involving Canadians and Canadian institutions, and is meant as a discouragement to international money laundering for organized crime.

Cryptocurrency ICO regulations in Canada

The CSA Staff Notice 46-307 Cryptocurrency Offerings also outlines the regulations for initial coin or token offerings. It outlines how to tell if an ICO (initial coin offering) counts as a security or a software product, and it considers “substance over form.”

The bottom line is that the CSA decides whether an ICO involves securities on a case-by-case basis.

For an example of an ICO that does involve securities, consider the following: A company offers an ICO, and the value of the coin is tied to the company’s future success or profits.

By contrast, consider an ICO selling coins to let token holders play on a gaming platform. This would not involve securities.

As of the time of writing the notice, the CSA found that most tokens were securities. As such, most ICOs will typically be treated as securities, but there are exceptions (more on this later).

Requirements if they are securities

When an ICO is considered a security, it has to follow all of the regulations for security law. Most importantly, the company offering the ICO may meet the business trigger. If it does, then it needs to register as a dealer.

Regulations for cryptocurrency mining

It is a well-known fact that mining cryptocurrencies uses a great deal of energy. As a whole, the Canadian government has not restricted it. However, in Quebec, Hydro-Quebec is limiting the energy that cryptocurrency miners can use to 300 megawatts.

Experts predict that other energy providers may follow suit. They also do not rule out the chance that provinces will also place registrations.

Canadian regulations for crypto assets that are not securities

Even in the rare cases that cryptocurrencies are not considered securities, such as in the case of ICOs that let holders play a game, other regulations apply. The most important regulations are consumer protection laws, which vary by province.

Some of the requirements outlined in these consumer protection laws may include a right to cancel, misrepresentation, unfair business practices, and unsolicited goods.

Canada recently reinforced its stance

In March 2021, Canada reaffirmed its stance on regulating cryptocurrencies in a joint public notice from the CSA and Canada’s Investment Industry Regulatory Organization (IIROC). That notice also gave exchange operators additional information to stay within the country’s regulatory structure. The content is mainly geared towards businesses.

The main takeaway for the average Canadian is that cryptocurrencies will continue to be regulated, and the Canadian government is ensuring that exchanges and other platforms follow those regulations.

Cryptocurrency regulation and taxes

As previously mentioned, Canada first required taxpayers to pay tax on cryptocurrency for the 2013 tax year. To put things simply, cryptocurrencies are taxed as capital gains or business income, depending on how the person in question made them.

As of 2017, the CRA created a cryptocurrency unit to ensure Canadians investing in cryptocurrency pay their fair share of taxes. It also conducts tax-related crypto audits.

Canadians have to convert their cryptocurrency gains and losses to fiat (CAD) before reporting them on their taxes. The CRA does not require a specific method but requires it to be consistent and reasonable. For example, a taxpayer can consistently use data from just one exchange to convert or consistently use the average across several exchanges.

Using cryptocurrency to buy a product or service is considered a barter transaction. To declare it, Canadians need to convert the cryptocurrency into its value in CAD. This would typically reflect the product or service’s fair market value or what the vendor sells it for in Canadian dollars.

When cryptocurrency profits are taxed as business income, 100% of the income is taxable. When taxed as capital gains, only 50% is taxable. Taxpayers must still report the full income.

Quick tax advice for cryptocurrency: Keep your records

In the official guide for cryptocurrency taxes, the Canadian government strongly suggests taxpayers keep good records. These should include the date of cryptocurrency transactions as well as the value in CAD at the time of the transaction.

Keeping records is important because Canadians do not need to declare cryptocurrencies they buy or hold; they only need to declare those they sell. However, they need information on the original value of the cryptocurrency to declare it at the time of the sale. Considering some people buy and sell cryptocurrency years apart, records make this process much more manageable.

What cryptocurrency regulations mean for you

Knowing that the Canadian government regulates cryptocurrencies as securities is essential for anyone who owns or plans to own cryptocurrency. It delivers some additional peace of mind knowing that companies offering cryptocurrency are held accountable. It also lets you know to expect anti-money-laundering processes if you sign up for an exchange and expect to pay taxes on cryptocurrency transactions.