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Anti-money laundering rules for cryptocurrency dealers finalized by Canadian government

Author(s): Lori Stein, Evan Thomas, Maha Ansari

Jul 12, 2019

The Canadian Department of Finance published amendments to regulations made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2019 (PCMLTFA) (the Regulation [PDF]), which will apply to dealers in virtual currency and foreign money services businesses (MSBs) that service Canadian customers beginning June 1, 2020.

In this Update

  • Background on the Regulation and definition of virtual currency
  • Dealers in virtual currency that offer services to Canadian clients will generally be considered MSBs under the PCMLTFA and therefore subject to similar customer due diligence, recordkeeping, monitoring and reporting requirements as other reporting entities
  • Regulation of foreign cryptocurrency exchanges as foreign MSBs
  • Reporting and recordkeeping requirements for virtual currency transactions

Background

Back in 2014, the Canadian government amended the PCMLTFA to apply to “dealers in virtual currency” in accordance with recommendations of the Financial Action Task Force (FATF), the global standard-setting body for anti-money laundering and anti-terrorist financing (AML/ATF) laws. However, the coming into force of this amendment was delayed pending development of updated regulations by the Department of Finance.

Draft amendments to regulations made under the PCMLTFA were published in June 2018 (the 2018 Draft) for implementation in the fall of 2019, however, the 2018 Draft was widely criticized for its potential overbreadth, and the public comment period coincided with a House of Commons review of Canada’s AML/ATF regime as well as an FATF initiative to develop international guidance on virtual assets. As a result, publication of the Regulation was delayed and the Department of Finance continued to consult on the 2018 Draft while watching global developments.

The Regulation was finally published on July 10, 2019, reflecting the comments of Canadian industry and new FATF Recommendations to virtual assets and virtual asset service providers [PDF] (VASPs) published in June 2019  (the FATF Recommendations).

Dealers in virtual currency

The definition of virtual currency is  more precise than the definition included in the 2018 Draft, and adopts key language from the FATF Recommendations:

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 person or entity to have access to a digital representation of value referred to in paragraph (a).

This definition will capture well-known cryptocurrencies such as bitcoin and ether, but should not capture non-custodial wallets and other blockchain-related software which could have been caught by the 2018 Draft definition, which included any “information that enables a person or entity to have access to a digital currency.”

 Digital tokens backed by fiat currency,  commonly known as “stablecoins,” appear to be considered “funds” under the Regulation:

funds means

(a) cash and other fiat currencies, and securities, negotiable instruments or other financial instruments that indicate a title or right to or interest in them; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a fiat currency other than cash.

For greater certainty, it does not include virtual currency.

Consequently, transactions in stablecoins will apparently be subject to the same reporting and recordkeeping requirements as transactions in cash, as opposed to the requirements for transactions in virtual currency.

Money services business registration

Dealers in virtual currency that offer services to Canadian clients will generally be considered domestic MSBs or foreign MSBs under the PCMLTFA, and therefore subject to similar customer due diligence, recordkeeping, monitoring and reporting requirements as other reporting entities.  Regulatory guidance states that “dealing in” activities include virtual currency exchange services and value transfer services, which would likely include online trading platforms and brokerages/intermediaries for virtual currency transactions. Less clear is whether emerging platforms for cryptocurrency-secured lending will be considered “dealing in” activities.

Exchanges that offer custody services for the virtual currency sold on their platforms may also be subject to regulation under the Canadian Securities Administrators’ Proposed Framework for Crypto-asset Trading Platforms, as discussed in our Osler update, “CSA and IIROC propose regulatory framework for cryptoasset trading platforms.”

Regulation of foreign cryptocurrency exchanges

The Regulation will also implement the foreign money services business registration requirement contemplated in the 2014 PCMLTFA amendments.  This means that as of June 1, 2020, foreign cryptocurrency exchanges will need to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) in order to continue to direct their services to Canadian clients, and be subject to the same compliance requirements as domestic MSBs, with slightly less onerous recordkeeping requirements. Regulatory guidance indicates that targeting, or advertising to, Canadian clients or having a Canadian domain name are indicia that a foreign MSB is “directing services” to Canadian clients.

The proposed amendments will authorize FINTRAC to levy administrative monetary penalties (AMPs) on foreign MSBs that are found to be non-compliant and to revoke the registration of foreign MSBs that fail to pay their AMPs. Financial entities will be prohibited from opening or maintaining an account for, or having a correspondent banking relationship with, an unregistered foreign MSB.

Reporting and recordkeeping requirements for virtual currency transactions

The 2018 Draft introduced broad requirements for virtual currency transaction reporting and recordkeeping.  These requirements have been revised and streamlined in the Regulation, likely reflecting input from industry and the FATF Recommendations. For example:

  • The deadline for filing suspicious transaction reports (STRs) has been changed to “as soon as possible” after the MSB has taken measures to establish reasonable grounds of suspicion, a more flexible approach from the 2018 Draft which imposed a deadline of three days after such measures were taken. This change will affect all categories of reporting entity under the PCMLTFA, as it amends the current deadline of 30 days after the reporting entity detects a fact that constitutes reasonable grounds for suspicion.
  • The requirement for virtual currency transaction records to include “every known detail that identifies the receipt” has been replaced with a more manageable requirement to include “every transaction identifier, including the sending and receiving addresses.”
  • The requirement for virtual currency transaction records to include “every reference number that is connected to the transaction” has been limited to reference numbers that “have a function equivalent to that of an account number.”
  • The requirement to record information about the transferor of virtual currency that has been received by an MSB for remittance to a known beneficiary has been limited to information which is obtained in the ordinary course of business of the MSB, which is much narrower in scope than the 2018 Draft requirement to record the date, type and amount of the virtual currency involved in the transfer, a material amount of personal information about the transferor and the purpose of the transfer if known.

Other topics covered in the Regulation

This Osler Update focuses only on the impact of the Regulation on the cryptoasset sector. The Regulation also covers numerous other topics relating to Canada’s AML/ATF regime, discussed at the time of the 2018 Draft in our Osler Update, “Canadian government publishes wide-ranging amendments to anti-money laundering laws.” This Osler Update does not include an analysis of changes from the 2018 Draft to the final Regulation in respect of these other topics.