Every month, TorontoStarts hosts a Toronto Cryptocurrency Conference focusing on a different aspect of cryptocurrency and blockchain technology. One of these events featured talks by Justin Hartzman (co-founder of CoinSmart, an online cryptocurrency exchange platform), Chetan Phull (founder of Smartblock Law), and Scot Johnson (founder of Digital Shovel, a guide for mining cryptocurrency) and a group panel.
The speakers briefly introduced cryptocurrency as a digital currency that relies on encryption techniques to generate and verify the transfer of funds. Blockchain is the underlying technology that records and keeps a ledger of cryptocurrency transactions. Several relevant legal issues surrounding cryptocurrency were raised, and it quickly became clear that the law lags behind technology in this space. As Phull mentioned, this is still a very niche area of the law but there is a growing need for related legal services and a greater understanding of common issues. Specifically, issues with cryptocurrency contracts and litigation and the recent anti-money laundering legislation draft were discussed.
Cryptocurrency Denominated Contracts
While many people now regularly pay for goods and services in cryptocurrency, contracts involving cryptocurrency as “money” present a unique challenge. Under section 13(1) of the Currency Act, “every contract […] for money and every transaction, dealing […] with money [….] shall be made […] in the Currency of Canada” unless executed in the currency of another country or a “unit of account that is defined in terms of the currencies of two or more countries”. To date, cryptocurrency – including bitcoin – is not officially considered currency in any country.
We learned from the Conference that it is best to treat cryptocurrency as a commodity to ensure that contracts are enforceable. Still, there are challenges related to the treatment of cryptocurrency as a commodity. Recently, the OSC decision regarding Token Funder Inc. required that the initial token offering price be fixed to Canadian fiat currency instead of Ethereum to avoid the question of whether Ethereum should be considered “money”. Furthermore, suppliers of cryptocurrency are required to charge GST and HST on their payments, adding another hurdle to using cryptocurrency as payment in contracts.
With respect to enforcing cryptocurrency contracts, treating cryptocurrency as a commodity is similar to the treatment of foreign currency “as a commodity in the sense of an object of a commercial transaction” (Money in Canadian Law 2015). Therefore, should a dispute arise between two parties in a cryptocurrency-based contractual agreement, the aggrieved should not seek damages. As Phull describes in his blog, seeking specific performance or mandatory injunction is more appropriate.
Significant progress and clarity with respect to the Currency Act will be required over the coming years, as more individuals choose to use cryptocurrency as a means of monetary exchange.
Anti-Money Laundering Draft Legislation
Hartzman discussed how companies that engage in cryptocurrency exchanges act in a quasi bank-like role, yet businesses dealing in cryptocurrency are not currently required to have a licence to practice. CoinSmart, although unlicensed, is unique since it is the only Canadian company dealing in cryptocurrency that is backed by two Canadian banks (DC Bank in Vancouver and Luminis Financial in Toronto).
An absence of legal rules governing these businesses could allow for criminal activity and money laundering. Phull referenced the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which is set to be amended to impose more regulations on “money services businesses”. In a Regulatory Impact Analysis Statement in the Canada Gazette, there is a summary of the proposed amendments for the legislation. Its objective is to create more regulations for decentralized virtual currencies, which are “convertible” – that is, exchangeable for funds. Convertible virtual currencies are vulnerable to manipulation by criminal organizations who are laundering money or financing terrorist activities. These tokens are attractive based on their anonymity, global accessibility, and simplicity of transactions that do not require an intermediary.
The legislation proposes that businesses “dealing in virtual currency” would be “financial services”. As a “money services business”, businesses would be required to fully comply and register with FINTRAC. For example, when entities receive more than $10,000 in virtual currency, there are reporting steps that the business must take. By monitoring suspicious transactions, this new provision will allow for some level of legal oversight, but it may not be enough.
Businesses dealing in cryptocurrency need to be fully recognized as a unique business. There is tension between whether Ontario’s Securities Act or the Bank Act should govern these businesses. Instead of tweaking one piece of legislation to include cryptocurrency regulations for two very specific crimes, it may be necessary to draft novel legislation that explores the many ways that individual users and businesses engage with cryptocurrencies.
If cryptocurrencies continue to become more accessible to the general public and are increasingly used as “money”, it will be necessary for the law to adapt to the technology. As the law currently stands, it is important for businesses to be aware of the potential complications that cryptocurrencies pose. We will continue to watch for innovation and new legal precedents in this area of law.
Written by Lauren Chan and Summer Lewis. Lauren Chan is an IPilogue Editor and a business student at the University of Guelph. Summer Lewis is an IPilogue Editor and a JD candidate at Osgoode Hall Law School.