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Regulations about crypto-currencies remain uncertain

Focus on International & Cross-Border Law
|Written By Meagan Gillmore
Regulations about crypto-currencies remain uncertain
Usman Sheikh says it’s ‘almost every day that you see a new project being introduced’ related to crypto-currencies.

Lawyers are keeping a close eye on regulations about crypto-currencies, while advising more businesses about how to use the technology.

According to a recent paper published by the Bank of Canada, almost three per cent of Canadians owned Bitcoin, the most well-known digital currency, at the end of 2017.

Part of the appeal of blockchain, the technology used to make Bitcoin and other crypto-currencies, is an example of distributed ledger technology.

Blockchain can be useful for businesses because it allows them to process many transactions quickly with fewer costs, says Usman Sheikh, partner and national head of the blockchain and smart contract group at Gowling WLG (Canada) LLP in Toronto.

“Many businesses have taken a look at the technology itself and have seen that it can be employed in a quite revolutionary way to change the underlying fabric of their usual transactions to do things quicker, more efficiently, in a less complex way at a far lower cost,” he says.

Sheikh has been working in this field for about three years and says work related to blockchain and crypto-currency occupies about 80 per cent of his time.

“It’s almost every day that you see a new project being introduced,” he says.

Some companies believe distributed ledger technology will be more transformative than the internet was, says Carol Derk, a partner at Borden Ladner Gervais LLP in Toronto, who has seen blockchain used in various ways from supply chain management to heatlh care to charities.

Blockchain is a way of storing data in a peer-to-peer way, says Tracy Molino, counsel in Dentons LLP’s Toronto office, who writes often about financial technology, including crypto-currency and distributed ledger technology.

Transactions are recorded in a series of blocks that are chained together, says Molino.

The decentralized nature of it means “every person in the blockchain ecosystem has the same copy of all of that transaction history and all of those blocks at any given moment,” she says.

They can also see the complete history of the transactions, she says.

Blockchain and other distributed ledger technologies allow parties to transfer funds without traditional trusted intermediaries, such as banks or clearing and settlement agencies, says Sheikh.

“Crypto-currency is really the exact opposite [of fiat currencies],” says Molino, referring to traditional legal tenders, such as the Canadian dollar or euros.

“Its value is not derived from a trusted government authority. It’s really being driven a lot more by supply and demand and other market forces.”

Crypto-currencies can look like many different things, says Molino, so it can be difficult to determine if it’s a currency or a security and, as a result, how it should be regulated.

“It falls into an uncertain place in Canada from a regulatory perspective,” she says.

“It’s a little bit like putting a square peg in a round hole,” says Derk. “[Regulators] look at some of these coins and tokens and say, ‘They’re securities and, therefore, you must comply with securities legislation,’ and in many instances that makes sense.

“But for many of them, it does not make sense, but we don’t have yet developed specific crypto-currency legislation that we could look to for guidance.”

Canadian investors need to analyze if coins they purchase from non-Canadian companies are securities or not.

“If it isn’t a security, we’re looking at something that doesn’t have a lot of guidance,” she says.

If businesses want to use crypto-currency internationally, they need to remember that many areas of law are involved, says Sheikh.

“It’s a horizontal technology that very much impacts countless vertical industries and many vertical areas of law. It will impact securities law,” he says.

“It will impact banking law, tax law. Each one of those areas of law are trying to grapple with the application of their respective legal regimes with this new technological development.”

The Canadian Securities Administrators published Staff Notice 46-308 in June about offerings of coins and tokens to help clarify when coins and tokens can be considered a utility and when they are a security.

But these guidelines don’t give clear regulations.

“There aren’t any prescriptive rules that we can clearly turn to,” says Derk.

Regulations about crypto-currencies vary in different countries, says Molino.

Canada introduced changes to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act that would have expanded the definition of money service businesses to include dealers in virtual currency, but that hasn’t been declared in force, she says.

“The best we can do is stay informed about regulatory trends in other countries and work with a wide network of experts,” says Molino.

Lawyers also need to determine what exactly their clients want to do, she says.

They may want to use blockchain to solve a problem and crypto-curency may have nothing to do with their situation.

“It’s important to ask your client the question about what they’re trying to do,” she says.

“Is your client really coming to you with a technology question or a crypto-currency question?”


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