Canada and U.S. crypto regulations

Tags: AMLCryptoKYC
Canada and U.S. crypto regulations

The U.S. is one of the largest and most influential crypto markets. In 2021, it saw the highest cryptocurrency gains, with investors gaining $47B in value. It has the second most number of crypto investors, after India. And it saw 44% of crypto owners adopting it for the first time that year. With the world’s largest economy, how crypto regulations are defined in the U.S. will significantly impact global crypto adoption.

While not as large a market as the U.S., Canada is also a significant player in crypto. The country already has 40 crypto exchange-traded funds (ETFs), which are experiencing strong growth and are among the leaders when it comes to crypto regulations:

  • The first country to have Anti-Money Laundering (AML) regulations for cryptocurrency service providers
  • The first jurisdiction to register a cryptocurrency-only investment fund
  • Applied existing securities laws to cryptocurrencies in 2017

North America is an essential market for crypto exchanges and other industry players, and it’s vital to understand the regulatory environment.

U.S. crypto regulations

In the U.S., there’s a move to create a coordinated approach to all things crypto using tools such as an Executive Order. Different agencies and regulators are examining the issues, including the Securities and Exchange Commission (SEC), the Commodities Futures and Trading Commission, federal banking agencies and the Departments of Treasury, State, Justice, and Homeland Security.

There are six priorities:

  • Providing consumer and investor protection
  • Ensuring financial stability
  • Preventing illicit finance
  • Driving U.S. leadership in the global financial system and economic competitiveness
  • Enabling financial inclusion
  • Promoting responsible innovation

At a crypto conference, Associate Director of FinCEN, Alessio Evangelista, stated

financial institutions that operate in the cryptocurrency space have the same obligations as all other financial institutions to ensure that their new offerings can leverage innovations while still protecting consumers, reducing cybercrime, combating illicit financial activity, and ensuring their platforms are not used to harm our national security interests.

There are also numerous bills in various stages in Congress; the 18th Congress introduced 50 bills and resolutions regarding crypto regulation, blockchain and Central Bank Digital Currencies. One bill that is gaining traction due to the collapse of terraUSD is regulating stablecoins.

While these initiatives make their way through analysis and potential codification, numerous rulings and clarifications have been made.

Is Bitcoin a security?

In 2019, SEC Chair Jay Clayton stated, “Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with bitcoin. That type of currency is not a security.”

How is Bitcoin regulated?

In the U.S., Bitcoin exchanges are considered money service businesses (MSBs). FinCEN issued guidance regarding Persons Administering, Exchanging, or Using Virtual Currencies:

In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

As a “financial institution,” MSBs are required to comply with Bank Secrecy Act laws and regulations, including AML requirements and Know Your Customer (KYC) rules.

Are other digital assets securities?

There has been a lot of confusion about categorizing various digital assets. As each token has a different use and financial structure, determining whether an asset is a utility or security is unclear. The ramifications are significant, as security (or asset) tokens must comply with security laws, while utility tokens don’t.

According to the U.S. Supreme Court Howey Test, if people invest in a token because they think they can profit, it might fall under an ‘investment contract.’ There are four considerations for the Howey Test:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To be derived from the efforts of others.

Many assets, including NFTs and DeFi tokens, are under scrutiny by the SEC for failing to follow security laws, and there have been significant enforcement actions. Current SEC Chair Gary Gensler noted in May 2022 that SEC has jurisdiction “over probably a vast number” of other cryptocurrencies.

Can banks deal with digital assets?

Through various Interpretive Letters, the Office of the Comptroller of the Currency (OCC) is allowing U.S. national banks to:

  • Take custody of cryptocurrencies
  • Hold U.S. dollar reserves against stablecoins
  • Use blockchain nodes and stablecoins for payment activities

But Acting Comptroller Michael Hsu has put out a more recent Interpretive Letter. According to former U.S. FDIC regulator Jason Brett, it will “only add confusion to the marketplace … leaving only the largest and most well-funded incumbent banks in a position to afford conducting cryptocurrency activities.”

Complying with the Travel Rule

The Financial Action Task Force (FATF) guides how its 37 members regulate cryptocurrency exchanges. One controversial guidance is the so-called travel rule that requires

obligations to obtain, hold, and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions, and prohibit transactions with designated persons and entities.

The travel rule is about knowing both parties of the transaction and helping to ensure the transaction is not connected to illegal activities.

FinCEN ruled that the existing travel rule requirements apply to cryptocurrency exchanges. On February 16, 2022, 18 U.S. digital asset companies unveiled the Travel Rule Universal Solution Technology (TRUST) to comply with the requirement while protecting the security and privacy of customers.

Complying with Sanctions

As with other financial institutions, crypto companies must monitor and screen new and existing clients against applicable sanction lists. Ari Redbord, who served as a senior adviser to the Treasury Department’s undersecretary for terrorism and financial intelligence, suggested

What we are seeing is that the Department of Justice is going to actively go after actors that attempt to use cryptocurrency, but also that it is hard to use cryptocurrency to evade sanctions.

These are just some of the issues the Federal government is considering; there are also numerous state initiatives. Hopefully, the Executive Order on Ensuring Responsible Development of Digital Assets can help build consensus, and the U.S. will put in a legal framework to

ensure that safeguards are in place and promote the responsible development of digital assets to protect consumers, investors, and businesses; maintain privacy; and shield against arbitrary or unlawful surveillance, which can contribute to human rights abuses.

Crypto regulation in Canada

All cryptocurrency dealers are considered MSBs and have similar requirements regarding due diligence, record keeping, monitoring and reporting.  Virtual Asset Service Providers (VASPs) must register with Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) and have KYC procedures in place, including customer identification. Additionally, any cryptocurrency transfer over CAD 10,000 needs to be reported.

For reporting issuers that are materially involved with crypto assets, the Canadian Securities Administrators has published guidelines to help issuers “avoid inaccurate or misleading disclosure and to provide the information necessary for investors to make informed investment decisions.”

A distinction is made between crypto-asset trading platforms (CTPs) that immediately deliver crypto assets to clients and those with custody of the assets. If a CTP holds, possesses or controls the asset, then the asset is treated as a security or derivative, and the CTP is regulated as a security dealer.

Preparing for future regulations

It seems just a matter of time until the U.S. develops a clear crypto regulatory stance. Institutional investors and the mainstream public will be more comfortable investing in the sector when it does. Ensuring compliance procedures are robust, can scale and deliver a quick, seamless experience will help expand in the vital North American markets.


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