This document provides an overview of decentralized blockchain and cryptocurrency laws in Canada. It defines blockchains as distributed ledgers that exist on multiple devices and act as a public record of transactions. Cryptocurrencies are digital assets based on distributed networks that use cryptography for transfers and record keeping. The document then explains how blockchains work at a technical level, with transactions validated by nodes and added to the blockchain in blocks. It discusses the relevant Canadian legislation around anti-money laundering, securities, and virtual currencies. Finally, it outlines some legal and technical risks to consider for blockchain networks.
2. BLOCKCHAINS
Distributed ledger existing on multiple
devices that acts as a
public, virtual record of transactions
CRYPTOCURRENCY
Digital asset based on a distributed network that
uses cryptographic technology for the transfer
and record keeping process
Overview
Cryptocurrencies are typically distributed as an incentive to validate
transactions on a blockchain
3. Bitcoin Protocol
Ethereum Protocol
A blockchain's ledger is
composed of chronologically
executed "protocols"
A protocol is a set of
instructions or rules that
validate transactions.
Examples include:
How Do They Work?
4. Blockchains are stored in the devices of
all participants, called nodes
The device of every node contains a full
copy of every transaction made
When a transaction is made, nodes use
their computing power to validate
transactions
Validated transactions are broadcasted
to the network, creating a new record,
called a block
Once a block is added to the blockchain,
the nodes that validate the transaction
receive cryptocurrency for their
contributions
Technical Layman
Transactions are put on a ledger
Everyone has access to the full ledger
When two people make a transaction, it
needs to be verified to confirm that
both parties have the proper balances
Other network users help confirm the
transaction was made properly and
receive money for helping
Once the transaction is verified, it is
added to the ledger
7. DO AML/TF REGULATIONS APPLY?
Can the business' cryptocurrencies be exchanged for fiat-
currency or for other cryptocurrencies which can be
exchanged for fiat-currency?
Crypto
Concerns
DO SECURITIES REGULATIONS APPLY?
Does the business convert money, sell cryptocurrencies or
allow its users to hold wallets on its platform?
9. Latest Guidance: CSA 21-327
Is the Cryptocurrency a "Security"?
Utility tokens like ERC20-based ones may
be securities based on previous guidance
Is there "Platform Risk"?
If the platform retains custody of the
wallet or cryptocurrency that is one
example there may be
10. "Dealing in Virtual
Currency" MSB
FINTRAC compliance required
Covers different MSB activities where
"Virtual Currencies" are used
Businesses that direct their services to
Canadians (FMSB) may be covered
PCMLTFA