Cryptocurrency offerings in Canada

While Canadian securities regulators are known for their methodical approach, movement in other jurisdictions suggests clarity could soon be coming to Canada’s regulatory approach, David Gardos believes. Mr. Gardos is a securities lawyer at Cassels Brock, a business law firm with offices in Calgary, Vancouver and Toronto.

The Canadian government seems to be analyzing cryptocurrencies on a case by case basis, Mr. Gardos said. Ultimately they are going to have to give clearer guidance on ICOs as they do not fall nicely into any one category.

“It’s still pretty opaque. There hasn’t been a lot of clear explanations.”

David Gardos

Should specific tokens be determined to be securities things clear up fast, Mr. Gardos said. They would then be subject to securities legislation.

For a hint of how Canada may approach token and ICO regulation Mr. Gardos looks back two decades to the dot-com era. Most startups were businesses in the traditional sense but were just operating in the new space of the internet. So if the business conducting the ICO has a model that makes it clear what business they are in and how they operate it gives regulators a starting point. But doesn’t mean everything’s simple from that point.

“This represents a quantum leap for regulators,” Mr. Gardos said. “They have to get comfortable on what ICOs are. It’s a brand new business model.”

Each Canadian province and territory has its own regulator. Together they form the Canadian Securities Administrators (CSA), whose mission is to protect Canadian investors from unfair, improper or fraudulent practices and fosters fair and efficient capital markets. They tend to move slower than business organizations but are taking good first steps, Mr. Gardos said. Commissions are setting up sandboxes to get a better picture of how ICOs and the entire cryptocurrency industry functions.

Might a scam ICO force their hand?

“In the dot-com boom of the late 90s some companies had little more than a patent,” Mr. Gardos said. “You kind of scratch your head and say ‘there’s not much I see here’. There’s little more than an idea.

“I get the sense they are waiting for a big fish to make an example of.”

Since there are no clear guidelines, there’s the opportunity for bad actors to quickly raise money, Mr. Gardos said. They don’t need to provide clear disclosure but should beware – if they token is determined to be a security and the company has issued it without a prospectus then the penalties are severe.

In other areas of fin-tech, forward-thinking companies often assume strong regulation and prepare well in advance for it. Should issuers just assume their tokens will eventually be deemed securities?

“My advice is the first thing you should do is call the commission, sit down with them, and explain what you are doing,” Mr. Gardos said.

For more information on continuous disclosure obligations in the Province of Ontario, click here

CSA Staff Notice 46-307 addresses cryptocurrency offerings.