Canadian securities regulators are facing a dilemma regarding the legal facets of cryptocurrencies. The digital currency is maturing in a gray zone as regulators realize that many cryptocurrencies involve the sale of securities. Subsequently, they need to devise and adapt the regulations to assert necessary levels of control while not stifling innovative funding models.
Tokenized securities differ from cryptocurrency coins
Cryptocurrency is still in an embryonic stage in several sectors. A veil of ambiguousness hovering over this emerging digital asset makes that the limits between the various categories and sub-categories remain nebulous.
Cryptocurrencies, such as Bitcoins, are digital currencies that use encryption techniques to regulate the generation of units of currency and monitor transfer of funds. Cryptocurrencies operate independently of banks or regulatory authorities.
Utility tokens, on the other hand, are services or units of services that can be bought. They are used to fund projects of shared infrastructure that could not be funded previously. These utility tokens may be pre-mined or bought and sold in crowd-sales when tokens are launched.
A cryptocurrency is referred to as a tokenized security if it represents shares of a business. The Canadian securities regulators announced in August that they noted that many cryptocurrency offerings they have analyzed involve the sale of securities. They subsequently pinpoint that these offerings should abide the existing tough rules unless specifically granted exemptions.
Delineating profit-related and non-profit-related cryptocurrencies
The Canadian Securities Administers (CSA), which is an umbrella of provincial watch-dogs, voiced that a clear demarcation should be made between digital coins related to future profits or success of a business, and those providing access to a specific good, such as the ability to play a video game. In the former case scenario, the cryptocurrency will be considered a security, while in the second case scenario, the cryptocurrency may not be qualified as a security.
Many of the cryptocurrency offerings examined by the CSA revealed to have aspects that cannot escape securities laws of Canada. Many of them were investment contracts, too.
The statement of the CSA did not please many from the fintech sector. In their opinion, the guidance provided is not clear enough and many gray zones still persist.
Protecting the interests of investors
In the same vein, the CSA drew attention to the fact that amidst the increasing number of cryptocurrency offerings such as Initial Coin Offerings (ICO), Initial Token Offerings (ITO), and sales of securities of cryptocurrency investment funds, it is crucial to protect the interests of investors. Issues such as volatility, transparency, valuation custody, liquidity and use of unregulated cryptocurrency exchanges, investors, not fully aware of all the properties of the investment products, may be harmed by unethical or illegal schemes.
To guide fintech businesses to determine whether an investment contract exists or not, the CSA recommends using a four-prong test:
– Does the ICO/ITO involve an investment of money?
– Does it involve a common enterprise?
– What is the expectation of profit?
– Does the ICO/ITO come significantly from the efforts of others?
The CSA also called upon businesses to disclose information such as the fundraising goal, the project, amongst others in proper prospectuses or offering memorandum (OM) rather than doing so through the publication of white papers which are not structured in the same way as the previous documents. Investors are recommended to submit documents that comply with the requirements of securities laws.
Canada launched its first cryptocurrency
Canadian financial regulators finally approved the public sales of digital currency in August. Thus, the Montreal-based Impak Finance got the green light to launch its public sale of its digital currency named as Impak Coin (MPK). Ahead of this launch, the company had already raised about $1.5M CAD. The campaign which ended in September issued a total of 1,713,148 MPK.
The CEO of Impak Finance, Paul Allard, highlighted that the goal of this new currency is to reduce the power o the big banks, redefining how property rights are managed and how money is created.
Impak Coin users will have a mobile wallet connected to their smartphones. They will be able to spend the currency through this wallet and exchange it for traditional money as well. Approximately 500 businesses signed up to accept this currency.