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Canadian Anti-money Laundering Regulations For Cryptocurrency Businesses

Part 2 of our mini-series on Canadian Cryptocurrency Regulations covers rules and regulations for Canadian entities dealing with cryptocurrencies, focusing on securities rules, anti-money laundering (AML) regulations & taxing policies. We will cover all topics relating to AML for virtual currencies.

Overview of the Canadian Crypto Markets

Major Milestones in Canadian Cryptocurrency Industry from 2021

Earlier this year the world’s first directly backed Bitcoin Exchange Traded Fund (ETF) was approved in Canada, enhancing access to cryptocurrencies for all investors. And the launch of the first crypto ETF opened the gate for similar products in Canada, demonstrating a shift in regulations. Following these significant milestones, we see value in examining the current regulatory framework surrounding cryptocurrencies in Canada, from securities law to anti-money laundering and taxation.

Our first piece of the Mini-Series covers securities laws in Canada, concerning businesses dealing with cryptocurrencies: Canadian Securities Regulations For Cryptocurrency Businesses 

This second part will particularly focus on understanding and applying Canadian anti-money laundering rules to cryptocurrency entities.

Navigating the Canadian Regulatory Space for Crypto-Dealing Businesses

Under the Bank of Canada Act, cryptocurrency is not considered legal tender in Canada. As a result, the asset is treated as a commodity, rather than “money” from a tax perspective. Under securities laws, the Canadian crypto exchanges or “tokens” are classified as securities, thus are required to comply with securities regulations. Finally, from an anti-money laundering perspective, cryptocurrency entities are bound by strict AML regulations, given they are considered money services businesses. Even though the legislative field is still playing catchup, there have been enforcement actions and a renewed focus on regulating virtual currencies across all pillars, with respect to recent players and activities in the crypto field.

Applying Canadian Anti-Money Laundering Rules to Cryptocurrency

Canada’s FINTRAC and AML Regulations

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit (FIU), operating within the ambit of Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its Regulations. 

Under PCMLTFA, Reporting Entities, which include Money Services Businesses (MSBs), are required to comply with various anti-money laundering / anti-terrorist financing regulations. 

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit (FIU), operating within the ambit of Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its Regulations. 

Under PCMLTFA, Reporting Entities, which include Money Services Businesses (MSBs), are required to comply with various anti-money laundering / anti-terrorist financing regulations. 

 

Cryptocurrency Entities as Money Services Businesses (MSBs)

As of June 1, 2020, “entities dealing in virtual currencies” were added to the definition of MSBs. These entities could be:

  1. Virtual currency exchange services which exchange:
    • Funds for virtual currency;
    • Virtual currency for funds;
    • Virtual currency for another virtual currency.
       
  2. Virtual currency services, including:
    • Transferring virtual currency at the request of a client;
    • Receiving a transfer of virtual currency for remittance to a beneficiary.

AML Requirements for MSBs in Canada

Regulatory rules for money service businesses in Canada include the following steps:

  1. Register with FINTRAC: MSBs in Canada are required to register with FINTRAC before beginning to operate in Canada. The registration should be renewed every two years. FINTRAC does not charge any registration fees. MSBs that are licensed or registered with a province or territory are still required to register with FINTRAC. As of June 1st, 2020, foreign MSBs (entities without a place of business in Canada but provide MSB services to people located in Canada) are also required to register with FINTRAC.
     
  2. Establish and implement a comprehensive and effective compliance program: Five required elements of an effective AML/ATF program include:
    • Appointment of a compliance officer
    • Development and application of written compliance policies and procedures
    • A risk assessment of business activities and relationships 
    • The development and maintenance of a written ongoing compliance training program
    • The institution and documentation of an effectiveness review of the compliance program
       
  3. Know your client: According to the PCMLTFR, MSBs must verify the identity of clients for certain transactions and activities, which includes the following methods and additional activities:
    • Appointment of a compliance officer
    • Politically exposed persons and heads of international organizations requirements
    • Beneficial ownership requirements
    • Business relationship requirement
       
  4. Reporting: MSBs should complete reports about certain transactions to submit to FINTRAC. These include: 
    • Suspicious transactions 
    • Terrorist property
    • Large cash transactions
    • Electronic funds transfers
       
  5. Record keeping: MSBs are required to keep certain records and provide them to FINTRAC if required to do so.

As of June 1, 2020, entities engaged in virtual currencies are considered MSBs and are required to register with FINTRAC. Additionally, they are required to comply with all obligations mentioned above, as applicable to their business model and handling of virtual currencies. Further information on each step can be found on FINTRAC’s site.

The activities described above are enforced and monitored in Canada at the federal level. However, it is also worth noting that Quebec is the only province or territory that regulates MSBs, through the province’s Money Services Business Act (MSBA). The MSBA has been administered and enforced by the Autorité des marchés financiers (AMF), Quebec’s securities regulator, since 2012. The provincial Act requires MSBs to hold a license of one or more of the following classes: currency exchange, fund transfer, cheque cashing, the operation of automated teller machines and the issue/redemption of traveler’s cheques, money orders, or bank drafts. Since 2015, the Act also covers entities operating virtual currency automated teller machines, such as Bitcoin ATMs. However, outside of this group, it is not clear whether cryptocurrency entities need to be licensed in Quebec or what license category they would fall under.

 

Regulations for MSBs: Canada versus the United States

Despite the Quebec exception, the overall regulatory framework for MSBs in Canada is still quite simple and manageable for virtual currency businesses. This is especially true when compared to the regulatory landscape in the U.S. for businesses dealing in virtual currencies. At first glance, requirements in both countries resemble each other. Entities dealing with cryptocurrencies in the U.S. are also considered MSBs at the national level, given they qualify as “money transmitters”. Therefore, crypto entities in the U.S. must also register with their federal AML-authority, The Financial Crimes Enforcement Network (FinCEN), and create a compliance program similar to their Canadian counterparts. Yet, in the U.S., in addition to national AML controls, there are also requirements certain MSBs (or Money Transmitters) must comply with at the state level, which is where things can get complicated. Cryptocurrency entities in the U.S. must obtain their money transmitter licenses in states they wish to operate in if they are considered money transmitters in those particular states. Unfortunately, understanding whether or which crypto entities qualify as money transmitters could be a very demanding and confusing process, given potentially inconsistent and unclear regimes across states.

Requirements for MSBs Canada US
Register with AML authority
Establish a compliance program
KYC, Reporting & Record Keeping
Licensing X

For more information regarding the topic, check out our paper on Money Transmitter Licensing in the US for Crypto Entities to further understand the AML requirements.

 

Travel Rule in Canada

In February 2020, the Travel Rule (where certain reporting entities are required to pass on identifying information about a customer to the next reporting entity when sending money on the customer’s behalf) was extended to include businesses dealing in virtual currencies. What this means is, crypto-asset dealers that participate in cross-border transactions are subject to enhanced due diligence measures set out by the Act. The Travel Rule for virtual currency transfers has been in force for Canadian MSBs since June 1st, 2021.

Our Compliance Capabilities for Cryptocurrency Entities

For cryptocurrency entities, the Canadian AML regulations have become stricter in the last year. As of June 1, 2020, entities engaged in virtual currencies are considered Money Services Businesses under FINTRAC and are required to comply with several regulations, which are unique to virtual currencies.

Taking into consideration the ever-growing regulatory field and potential penalties for non-compliance, working with Sia Partners can add crucial value to your business. With our subject-matter consultants, Sia Partners is ready to assist you with all your compliance needs as a cryptocurrency entity. We are offering a team of former regulators with extensive experience in interpreting and implementing rules, to help your company manage and mitigate compliance risks.