The Canadian parliamentary finance committee, after conducting a review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), recommended three ways the Canadian government should monitor and regulate cryptocurrencies.

While conducting the review, which began in February 2018, the finance committee held 18 meetings and heard testimony from 70 expert witnesses. The PCMLTFA is an act that requires review every five years, so this will be the first review to be conducted with cryptocurrencies now so prominent in our financial systems.

Regulating cryptocurrencies in Canada

The committee started with a recommendation that all platforms which convert fiat currency to and from cryptocurrencies should be regulated as they are operating as money-services businesses (MSBs). This would bring such exchanges fully under the financial-reporting guidelines of the Canadian government in compliance with the PCLMTFA.

In June 2018, the Department of Finance recommended similar action in relation to virtual currencies in response to a 2015-2016 Financial Action Task Force review of Canada’s Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) regime.

In the current review, the finance committee has also recommended that cryptocurrency exchanges require a specific licence such as the “BitLicense,” or virtual currency license, system operated by the New York State Department of Financial Services (NYSDFS) in the U.S.

The committee’s report cites suggestions from financial advisors IJW & Co and law firm Durand Morisseau LLP, two of the many experts that contributed. It said the absence of “regulatory oversight” could mean that cryptocurrencies are used by some parties to quickly move large amounts of wealth across borders. Such transactions can be partly or completely anonymous due to the nature of some cryptocurrencies and the lack of checks conducted by some exchanges. When using an exchange that does not conduct AML or know your customer (KYC) checks, users conducting transactions may easily provide false information in order to launder money.

Money service business regulatory framework

Regulating cryptocurrency exchanges in the same was as MSBs or adding specific license requirements would allow regulators to impose rules for AML and KYC checks, ensuring that large transactions by users can be identified. This could ensure the legality of such transactions and prevent illicit behaviour.

The third recommendation by the committee is that cryptocurrency wallets should also be regulated, a move less common by global regulators in the space to date. Regulating wallets would again ensure that cryptocurrency wallet providers implement checks, deter crime, and making transfers and identities more easily tracked by law enforcement.

The cryptocurrency regulation recommendations form part of an overall review of the PCMLTFA and a response must be given to the committee’s report and recommendations by the House of Commons within 120 days.

Canada is not without cryptocurrency regulation already, though. The Canadian Securities Administrators (CSA) and its provincial securities bodies like the Ontario Securities Commission (OSC) actively regulate cryptocurrencies where they have characteristics of securities. Under this activity, initial coin offerings (ICOs), cryptocurrencies, and tokens, come under the CSAs oversight and form part of an educational program to inform Canadian investors.  

 

Image credit: Wikimedia Commons

 

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