Matthew Burgoyne of Osler, Hoskin & Harcourt LLP discusses how cryptocurrency is regulated, how the law is evolving, and the major challenges clients are currently experiencing.
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Stephanie: [00:00:13] Hello, I'm Stephanie Matteis and welcome to Lexpert TV. The collapse of the crypto market earlier this year created a crisis of confidence following heavy investment losses and the high profile bankruptcy of some crypto lenders. For institutional investors, it's important to understand the crypto market and assess all risks before investing in this space. We're here with Osler, Hoskin and Harcourt's Matthew Burgoyne, co chair and partner at their digital assets and Blockchain practice. Matthew will share the due diligence steps investors can take to mitigate their risks and speak to where regulation may be headed. Welcome, Matthew.
Matthew: [00:00:52] Thank you. It's a pleasure to be here.
Stephanie: [00:00:55] First question for you how is the cryptocurrency market regulated in Canada and how does that compare to the US?
Matthew: [00:01:03] Great question. I should preface my answer by saying that I'm not a US trained lawyer, so I'm a Canadian lawyer, but I do have a general understanding of of the similarities actually between the two countries and their regulatory treatment of cryptocurrency in the US as in Canada. I think most of the action in the law is in anti-money laundering legislation and securities law, and mostly, I would say securities law in both countries is where most of the regulation and the registration requirement and some of the controversies arise. And so we have a different regulatory regime in Canada versus the United States when it comes to securities law. We don't have a federal securities regulator. We have every province and territory has its own provincial securities legislation and regulator enforcing the legislation. In the US, there's one federal regulator, the SEC. So but I think there are big similarities between the securities legislation in each country and to an extent the anti-money laundering and counter-terrorist financing legislation. And so it's it's similar in that and that both those areas are the primary sources of law when it comes to cryptocurrency and regulation.
Stephanie: [00:02:30] Thanks, Matthew. Moving along, how do you see the law evolving here for the cryptocurrency sector?
Matthew: [00:02:37] There's two main comments that I have. The first is I think there's going to be in Canada a focus on a continued focus on the payment space and how forthcoming payment legislation that's designed to impact payment service providers might impact cryptocurrency companies. So there's a piece of legislation called the Retail Payment Activities Act. That's federal legislation that's not enforced in Canada, but it's coming. And there are some concepts in that piece of legislation that might apply to cryptocurrency companies who are offering or performing a retail payment activity so they could be caught within the legislation. So that's coming. And I think more the evolution is is more more so going to happen with securities law. So we have focused in Canada on crypto asset trading platforms for the most part and and how securities law applies to those, those trading platforms. So I think what we're going to see is all of the crypto asset trading platforms or crypto exchanges in Canada are going to be registered soon with IIROC, with the Investment Industry Regulatory Organization of Canada, which is a self regulatory organization. And so we're going to see a number of crypto exchanges. I think there's around nine of them right now that they're registered under an interim registration framework. They're going to be shortly all registered with IRA. So that will be interesting to see what the terms of registration turn out to be for each of the platforms. I think we're going to see more enforcement action in the next few years on unregistered trading platforms in Canada and as well on token issuers that are doing initial coin offerings or that are still doing those kinds of activities in Canada on an unregistered basis, I think we're probably going to see some more guidance on how Canadian securities law applies or doesn't apply to stable coins and as well as non fungible tokens. And also what's most interesting in my mind is, is hopefully we're going to see guidance on how the law applies to decentralized finance platforms. So, you know, is it coder who might have coded some smart contracts that that created a trading platform where individuals trade with each other? Is that code or responsible years after he or she coded the smart contract is are they responsible for for the platform? If it's dealing in securities or derivatives, who's responsible? Because a lot of these decentralized finance platforms operate autonomously through code where users interact directly with each other. So it's not clear in that case who the issuer of securities is and who the dealer is. So that'll be interesting to get some guidance on that. So I think that's going to be coming and in the next few years as well.
Stephanie: [00:05:55] What are the major challenges for clients in the cryptocurrency sector at the moment?
Matthew: [00:06:00] So some of the major challenges, a lot of the clients that I have are young people. They're either young people who are proficient in coding, they're developers, and the costs to comply with securities regulation and anti-money laundering regulation is pretty high. There's a high barrier to entry. There's a high cost to to comply on an initial basis to become registered under both regulatory regimes, under both securities law and anti-money laundering law. And then to stay registered and to stay in compliance can be pretty costly. I think another one of the challenges is the lack of clarity with regards to specific subcategories or sub industries in cryptocurrency. So for example, a fiat Canadian dollar anchored stablecoin, it acts as both a payment mechanism or a utility, a way to pay for goods and services. But according to some provincial security regulators, it can also be a security. So it's got properties of a currency and it has properties of a security. And it's very confusing to entrepreneurs in the space on how to move forward and whether they should be offering fiat stablecoins to consumers and what the rules are around that. So regular regulatory clarity is definitely an issue. I think the other big challenge is the amount of hacks and and fraud. So there's many examples over the last few years, probably I'd say probably hundreds of examples, unfortunately, of Defi platforms getting hacked, hundreds of millions of dollars being lost. Scams are a big thing in the industry now, and so it definitely affects the perception and the public's perception of the industry and also, unfortunately, the government and lawmakers perception of the industry. And so we've got as lawyers try to battle against knee jerk reaction and legislation. We want more consultation and we want more feedback with and consultation with regulators. And we're really not getting that right now in Canada. Not there's not there hasn't been a ton of consultation where we as compared to other industries. So I think that's that's a big challenge. And then access to banking and insurance products is is being a big challenge for Canadian crypto entrepreneurs and businesses, large and small. You know, having your your, your operating account, your bank account shut down can really negatively affect operations. And so I think that banking and insurance is a big problem of lack of of of the ability to obtain insurance for certain products. And in the crypto space it's is proving to be a challenge.
Stephanie: [00:08:55] With the huge losses that so many small time investors have experienced on various tokens, are there any criminal prosecutions happening? And on that note, are there any initiatives or legal actions occurring on a consumer protection front?
Matthew: [00:09:11] So that's that's a great question. It's interesting because when you say consumer protection, each province has its own consumer protection legislation, and every cryptocurrency company that offers products and services to retail users is subject to that consumer protection legislation. They don't always follow the legislation. And, you know, some of the provincial acts like, for example, in Alberta have an Internet service regulation that dictates the terms and conditions that have to be in a service agreement. And I know a lot of providers out there are not adhering to that legislation. There's not a lot of enforcement in Canada when it comes to consumer protection legislation. Unfortunately, it's you know, individuals have to be vigilant or sorry, companies have rather have to be vigilant and ensure that they're getting proper legal advice and that they're complying with the provincial consumer protection legislation. There have been some criminal prosecutions in Canada. There's been a handful of them dealing with cryptocurrency. In May 2022, the Joint Chief of Global Tax Enforcement and the Canada Revenue Agency disclose it. It identified over 50 leads concerning crypto related tax crimes. So there were apparently some significant tax crimes being committed with NFTs non-fungible tokens that are going to become really popular and the popularity is waning a bit. But I think it's going to we're going to continue to see it rise. And then there was a case in March 2022 in Canada involving a $16 Million Theft of cryptocurrency, where the plaintiff actually obtained what's called an Anton Piller order and basically seized assets, got an order that entitled the plaintiff to investigate and have property detained and put under the control of a third party. So we're starting to see these types of freeze orders in Canada that more of an injunction is another type of order that was granted in March, also in March 2022 against the Freedom convoy, the truckers that were protesting the COVID restrictions. So there was a class action lawsuit launched against some of the organizers of the convoy, and the organizers were using cryptocurrency to fund the trucker protest. And so the plaintiffs successfully obtained an injunction which basically froze cryptocurrency and wallets before a judgment and prevented the cryptocurrency from moving from wall to wallet. Although in practice that it's very easy for someone to breach that order because they can simply transfer cryptocurrency from a frozen wallet to another wall that they control and then other wallets, etc.. So despite the handful of freeze orders Anton Piller and Mareva injunctions, it would be interesting to see in practice how effective those those actually have been. Finally, recently there was a Hamilton Ontario youth charged with stealing $46 million of cryptocurrency in a in a SIM swap. So they basically ported an individual's phone, convinced the carrier to support the phone to another phone, the service to another phone. And so all the passwords and the digital crypto wallet on the individual's phone were compromised. And I think this was like a 16 year old in Hamilton, Ontario, $46 million in return for stealing a fairly large sum of money. So we see there's a few other cases as well. But yeah, those are the big ones that come to mind. So unfortunately not a lot of consumer protection related litigation or enforcement, but definitely some criminal proceedings.
Stephanie: [00:13:19] And that wraps up this special episode. Matthew, thank you for sharing your expertise.
Matthew: [00:13:24] Thank you very much. It's been a pleasure.
Stephanie: [00:13:27] Our pleasure and thank you for watching Lexpert TV.