Businesses Dealing in Virtual Currency Face New AML and Reporting Requirements in Canada

In May 2021, the total value of cryptocurrency globally surpassed USD $2.5 trillion, and continues its emergence as a new asset class.[1]

Governments in Canada and around the world are updating regulatory requirements in response to the new innovations in financial technologies.

Historically, there has been regulatory uncertainty surrounding cryptocurrencies in Canada. However, entities dealing in “virtual currency” now face increasing reporting and monitoring requirements similar to those imposed on traditional financial institutions.

A series of recent amendments to the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and related regulations now address “virtual currency” transactions.[2] These changes are discussed below.

All businesses using cryptocurrency and blockchain technology should ensure that they are in compliance with these new requirements.

What is “Virtual Currency”?

Under the PCMLTFA regulations, as of June 1, 2021, “virtual currency” means:

(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a).[3]

Importantly, “virtual currency” is a digital representation of value, or a private key providing access to one, but it is not “fiat currency.”

Fiat currency refers to traditional money, such as Canadian dollars and is commonly defined as a currency that is issued by a country and is designated as legal tender in that country.

2020: Virtual Currency Exchanges deemed Money Services Businesses

In 2020, the first set of new regulations regarding virtual currency came into force and mandated the following changes:

  • Businesses or individuals dealing in “virtual currency” must now register as a “money services business” (MSB) with the federal government’s Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)[4]; and
  • MSBs are now required to report suspicious money transactions, and complete other Know-Your-Client (KYC) verification for transactions prescribed by the regulations.[5]

2021: Large Virtual Transactions and Reporting

On June 1, 2021, a second set of amendments to the PCMLTFA Regulation came into force, including:

  • MSBs will be required to report virtual currency transactions exceeding $10,000 in a single transaction, and maintain and submit transaction records for these large value virtual transactions; and
  • The KYC and reporting obligations that were introduced in 2020 (discussed above) will now apply expressly to virtual currency transactions.[6]

As part of these amendments, certain KYC obligations have expanded to apply to all MSBs and other reporting entities.[7] Among other things, all reporting entities must now: (i) determine if the client is a politically exposed persons, (ii) verify beneficial ownership, (iii) institute a compliance program and appoint a compliance officer, and (iv) conduct risk assessments and on-going KYC monitoring.[8]

As virtual currencies play a larger role in financial markets, Canadian businesses need to ensure that they comply with these new regulatory requirements, and seek legal advice on how the new virtual currency regulations may impact their operations.

If you have any questions about virtual currency, please contact Scott Lucyk.

[1] Jonathan Ponciano, Ethereum, Dogecoin And These Other Surging Cryptocurrencies Are Propelling The Market To $2.5 Trillion (May10, 2021) online: Forbes <https://www.forbes.com/sites/jonathanponciano/2021/05/10/ethereum-dogecoin-cardano-cryptocurrencies-propelling-the-market-to-25-trillion/?sh=466c99111276 >. The global market cap of cryptocurrencies has declined since this media report, and continues to fluctuate in response to market conditions.

[2] Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c. 17. Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2019: SOR/2019-240. These amendments have been published in the Canadian Gazette in 2019 and 2020; the majority of which are expected to come into force on June 1, 2021.

[3] Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations, SOR/2001-317, at s. 1(2).

[4] Notice on forthcoming regulatory amendments and flexibility (Modified January 22, 2021) online: Government of Canda’s Financial Transactions and Reports Analysis Centre < https://www.fintrac-canafe.gc.ca/covid19/flexible-measures-eng>.

[5] Who must report (Modified May 4, 2021) online: Government of Canda’s Financial Transactions and Reports Analysis Centre <https://www.fintrac-canafe.gc.ca/reporting-declaration/info/re-ed-eng>.; What is a suspicious transaction? (Modified June 1, 2021) online: Government of Canda’s Financial Transactions and Reports Analysis Centre <https://www.fintrac-canafe.gc.ca/guidance-directives/transaction-operation/Guide2/2-eng>.

[6] Regulations Amending the Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2019: SOR/2020-112.

[7] Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR), SOR/2002-184, ss. 4.1(a), 85, 145, and 155 (as will be amended when SOR/2019-240 comes into force).

[8] Compliance program requirements (Modified June 1, 2021) online: Government of Canada’s Financial Transactions and Reports Analysis Centre <https://www.fintrac-canafe.gc.ca/guidance-directives/compliance-conformite/Guide4/4-eng>.

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  • Scott  Lucyk
    Associate

    Scott is an associate in the Vancouver office of Lawson Lundell practising in the Commercial Litigation group. Scott has a broad range of experience including contractual disputes, shareholder remedies, joint venture and ...

  • Sean  Morris
    Summer Student

    Sean Morris is a summer articling student in the Vancouver office of Lawson Lundell LLP. He is interested in pursuing a career in corporate law, focusing on private equity & venture capital. 

    Sean completed an honours business degree ...

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