In June 2014, Canada became a leader in legislating cryptocurrency by passing a national law on cryptocurrencies.
The new rules, enacted under Stephen Harper’s Conservative government, amended existing legislation on money laundering and terrorism financing. The changes compelled companies dealing in virtual tokens like bitcoin to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), keep and retain detailed records and report suspicious transactions, among other things.
It was “certainly the world’s first treatment in law of digital currency financial transactions under national anti-money laundering law,” financial-crime lawyer Christine Duhaime wrote at the time.
Almost five years later, Canada is making headlines because a cryptocurrency exchange incorporated in British Columbia lost access to
some $180-million worth of digital money belonging to around 100,000 customers when its CEO died.
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Gerald Cotten, who was the sole director and officer at QuadrigaCX, ran the business from his laptop wherever he was and had exclusive access to the majority of funds held by the company, according to court documents filed by the company. On Feb. 5, Quadriga was granted court protection from creditors.
Quadriga’s meltdown happened in a regulatory vacuum. The 2014 crypto-related amendments to Canada’s money laundering laws have yet to come into effect. And little else has happened to protect cryptocurrency holderssince.
Currently, there are no rules that would prevent someone running a crypto exchange like Quadriga where millions are managed millions in customer funds from a personal computer without any kind of independent oversight or contingency plan, said Daniel Fuke, a lawyer with Fasken Martineau DuMoulin. Fuke has advised cryptocurrency exchanges, including Canadian crypto trading platform Coinsquare.
Provincial authorities have recently asserted their oversight over some crypto businesses, like those that seek to raise funds from investors and those that trade crypto assets like stocks.
The Canadian Securities Administrators (CSA), the umbrella organization of provincial and territorial securities regulators, said it is currently working with the Investment Industry Regulatory Organization of Canada (IIROC) to develop “an appropriate regulatory framework” for platforms trading crypto assets that trade like stocks or derivatives.
But Quadriga didn’t clearly fit the profile of a business that securities regulators would oversee. The platform allows customers to simply convert regular money into crypto or one type of digital token into another, operating more like a currency exchange.
It also managed to escape the oversight normally applied to banks.
“Any business that takes deposits in Canada has to be prudentially regulated, whether provincially or federally,” the Office of the Superintendent of Financial Institutions (OSFI) told Global News. “If the company wants to be regulated at a federal level, they have to obtain a bank licence (and thereby become regulated by OSFI).”
It’s not obvious, though, whether Quadriga’s activities qualify as taking deposits from customers, which would have required it to hold insurance.
As for the 2014 Harper law, its focus was on preventing the laundering of dirty money using cryptocurrency. The rules had nothing to do with protecting customer funds or ensuring that more than one person be in charge of the business, Fuke said.
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Still, complying with the regulation would have required Quadriga to have headquarters, employees and business records, Duhaime said.
Instead, the company either has no accounting systems or has not been able to produce “even the most basic of accounting summaries,” according to a report by Ernst & Young, Quadriga’s monitor in the creditor protection proceedings.
In a 2018 interview, Cotten told Global News that Quadriga voluntarily complied with FINTRAC regulation.
The agency said its records indicate that the crypto exchange “is not currently, and has never been, registered with FINTRAC.”
Richard Niedermayer, a lawyer with Stewart McKelvey in Halifax who represents Cotten’s widow, Jennifer Robertson, noted that voluntarily abiding by the financial watchdog’s rules doesn’t require registering with it.
Still, that might have been a moot point had Canada mandated that all crypto-businesses report to FINTRAC.
The Liberal government published proposed regulations to implement the 2014 money-laundering law in June of last year, but the new rules have yet to come into effect.
The four-year hiatus reflects a worry in Ottawa that making the rules too blunt would scare away innovative companies, causing Canada to lose its edge in the crypto space, according to Duhaime. But regulators were also struggling to fine-tune the regulation to a technology that kept evolving, she added.
“Given their complexity and precedence, these new regulations have required a series of consultations with industry, legal and enforcement communities,” reads a report from the Department of Finance dated February 2018.
The ministry has not provided Global News with a date when the new anti-money laundering regulations might be implemented.
“Our Government has taken steps towards adapting the current regulatory framework, while also observing the innovative potential of these new technologies,” said Anna Arneson, a ministry spokesperson, in an email. “Because financial markets are globally integrated, a coherent approach across jurisdictions will be important and that is why Canada is continuing to work with G7 and G20 partners in this regard.”
The ministry also noted that regulators in Quebec already require that crypto companies obtain a licence to operate in the province.
On Friday, the Ontario Securities Commission (OSC), Canada’s biggest securities regulator, said it was looking into Quadriga, as concerns grow that investors in the digital platform are being left unprotected against potential losses.
“Given the potential harm to Ontario investors, we are looking into this matter and have already been in contact with the monitor,” the OSC said in an emailed statement.
OSC spokeswoman Kristen Rose declined to say if it was an investigation.
Goodman said in the event of securities law violations, the OSC could bring an enforcement action against the company or its officers and directors. “If ultimately successful, one would suppose any monetary recovery could be used to address possible losses for customers,” he said.
For now, some 100,000 Quadriga customers are likely following regulators’ moves with bated breath.
— With files from Reuters