As anticipated in our 2019 year in review, there were significant and notable developments in the Canadian Fintech industry in 2020. These occurred in the context of the COVID-19 pandemic, which accelerated the growth of some segments of the Fintech industry (notably for example, point-of-sale (“buy now, pay later”) lenders, businesses facilitating digital onboarding/ ecommerce and/or cashless transactions), while presenting challenges for others (such as small business lenders and travel focused lenders). In contrast to the approach taken in some other countries (in particular, the United States), Fintech entities in Canada did not participate in deploying pandemic government relief to businesses in Canada.
The following is a summary of some of the key Fintech developments in 2020, as well as some regulatory developments to keep a watchful eye on in 2021.
WHAT WE SAW IN 2020
1.OPEN BANKING / CONSUMER-DIRECTED FINANCE DEVELOPMENTS
- On January 31, 2020, the Advisory Committee on Open Banking issued its first report (the “CDF Report”) in connection with the Department of Finance’s consultation process on open banking. The CDF Report recommended the use of the term “consumer-directed finance” to replace the term “open banking” and summarized the consultation key-takeaways to include: (i) financial inclusion; (ii) cybersecurity; (iii) privacy; (iv) financial stability; (v) liability; and (vi) technical standards. The CDF Report further recommended the development of a “robust consumer-directed framework” to “support a more innovative and competitive sector by setting rules and protections around data use, and requiring data to be transferred in more secure form”. The CDF Report noted that Canadians are already taking part in data aggregation and data sharing, notwithstanding the lack of existing framework, and that there is a pressing need to have in place a more secure, reliable way to do so.
- Financial Data Exchange, LLC (“FDX”), a not-for-profit organization aiming to facilitate secure data sharing, launched in Canada in July 2020 with 31 members, including the five major banks. Payments Canada also joined FDX in November 2020. FDX released an updated set of technical standards in December, including Version 4.5 of the FDX API.
- Following an initial delay due to COVID-19, the Department of Finance reopened its second stage of consultations on open banking/ consumer-directed finance with industry stakeholders. The reopened consultations consisted of five virtual sessions through November and December, 2020 and focused on how regulators and the financial sector can mitigate data security and privacy risks associated with open banking.
- As a result of COVID-19 and the acceleration of the move to digital commerce, 2020 saw a significant rise in digital and cashless payments, prompting the Bank of Canada to issue a notice encouraging retailers to continue to accept cash.
- On January 30, 2020, Payments Canada announced a new rule to enable broader point-of-sale (POS) debit card acceptance. The new Rule E5 will offer flexibility through delayed authorization, removing the current requirement for immediate connectivity which has made debit payments impractical for certain high-volume, time-sensitive transactions, such as paying a bus fare.
- The Payments Canada payments modernization journey continued in 2020. On September 11, 2020, Payments Canada began seeking feedback on policy proposals outlined in the consultation paper, “Canada’s New Real-Time Payments System Policy Framework”. Canada’s new real-time payments system, the Real-Time Rail (“RTR”), is expected to launch in 2022 and will allow Canadians to initiate payments and receive irrevocable funds in seconds. On November 12, 2020, Payments Canada announced the selection of Mastercard’s Vocalink as the clearing and settlement solution provider for the RTR.On November 30, 2020, Payments Canada completed a refresh to the technology that underpins Canada’s retail batch payments system, also known as the Automated Clearing Settlement System (ACSS).
3.DIGITAL IDENTITY DEVELOPMENTS
- In late 2019, the Québec government expressed its interest in creating a digital identity for all Québec citizens by 2021. To accelerate this goal, the Québec government provided funding to the Digital Identity Laboratory of Canada (the “Lab”), whose primary purpose is to promote the compliance of and interoperability between digital ID solutions across private and public sectors in an effort to advance Canada’s digital ecosystem. Along with the announcement to fund the Lab, on June 17, 2020, Eric Caire, Québec’s minister of digital transformation, announced that Québec planned to implement its new digital ID system in four phases, where:
- Phases 1 and 2 would involve the creation and launch of an ultra-secure digital ID and authentication system for citizens by 2021 and for companies by 2023, respectively;
- Phase 3 would involve the creation of a digital wallet to hold private information, such as drivers licenses and medical records, by 2025; and
- Phase 4 would involve enabling the ability for citizens to modify documents and information stored in their digital wallet.
- On October 19, 2020, the Ontario government unveiled its new Digital Identity Project, one of the more than 30 initiatives included in Ontario Onwards: Ontario’s COVID-19 Action Plan for a People-Focused Government. The Ontario government plans on introducing digital identities to provide individuals a secure, universal, and convenient way to prove their identity when accessing government services online.
4.CRYPTOCURRENCY AND DIGITAL ASSET REGULATION DEVELOPMENTS
- On January 16, 2020, the Canadian Securities Administrators (CSA) provided guidance about platforms that facilitate the trading of crypto assets (“Platforms”). The guidance distinguishes between Platforms where the parties to the trade take “immediate delivery” of the assets and those where the parties do not and instead rely on the operator of the Platform for various services. Where there is no immediate delivery, the regulators may argue that the Platform should be subject to securities or derivatives legislation because the crypto asset traded on it should be regarded as a derivative since it trades under a contract where there is no immediate delivery of the underlying crypto asset. Even where a Platform offers immediate delivery of the crypto asset for cash, there can be other attributes of the Platform that make it subject to securities laws such the Platform offering margin or leverage trading or if ownership of the crypto asset is recorded on the ledger of the Platform rather than being delivered to a wallet that is in the sole control of the user. The CSA made it clear in the notice that they will pursue enforcement action or continue existing enforcement action against Platforms that do not comply with their interpretation of securities legislation.
- Effective June 1, 2020, entities “dealing in virtual currency” were required to register as a money services business (“MSBs”) with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”).
- A number of notable decisions were issued by Canadian securities regulators in respect of digital assets in 2020. The Bitcoin Fund was launched by Canadian investment manager, 3iQ, in April 2020. The Bitcoin Fund is Canada’s first public investment fund which invests substantially all of its funds in bitcoin. The initial public offering followed a lengthy review by the Ontario Securities Commission (OSC), which ultimately approved the fund following a hearing before a Panel of the OSC. In August 2020, Wealthsimple Digital Assets Inc. was also granted relief to operate Canada’s first regulated crypto trading platform under the CSA Regulatory Sandbox. Wealthsimple will be exempt from certain registration, prospectus and trade reporting requirements for 24 months or until it becomes registered with the Investment Industry Regulatory Organization of Canada (“IIROC”).
- On June 11, 2020, the OSC publicly released an investigative report, in the form of a review by OSC Staff, of the crypto asset trading platform QuadrigaCX. The investigation determined that Quadriga collapsed due to fraud committed by Quadriga’s co-founder and CEO, Gerald Cotten. Quadriga collapsed in 2019 and resulted in an estimated loss of approximately $169 million for investors, 40 percent of whom were Ontarians.
- On July 16, 2020, the OSC approved a settlement with Coinsquare Ltd. (and others), marking the first settlement in which a crypto-asset trading platform that mainly facilitates trades in bitcoin and Ethereum agreed that it was subject to Ontario securities law.
- On October 20, 2020, the Securities and Exchange Commission entered into a settlement with Kik Interactive Inc. in relation to the Canadian company’s sale of digital tokens in 2017 that Kik agreed was an unregistered offering in violation of federal securities laws.
- The prospect of central banks issuing central bank digital currency (“CBDC”) garnered further attention during the COVID-19 pandemic. CBDC could be used to facilitate transactions without the need of exchanging physical currency, and could also potentially be used to facilitate an immediate and direct transmission of funds from the government to individuals in times of emergency. In Canada, the Bank of Canada joined other national central banks who have come together to share knowledge and assess potential use-cases for CBDC in their home jurisdictions. The Bank of Canada also implemented a portfolio of initiatives designed to prepare for the future of money and payments, including building, as a contingency, the capability to issue a retail, cash-like CBDC to the public, should the need ever arise.
5.ANTI-MONEY LAUNDERING REGULATION DEVELOPMENTS
- On June 10, 2020, amendments to regulations (the “PCMLTFR Amendments”) made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) were registered in the Canada Gazette. The PCMLTFR Amendments expanded obligations applicable to designated non-financial business and professions, and imposed additional obligations for casinos and real estate developers, brokers and sales representatives. Further, the PCMLTFR Amendments moved to exempt certain low-risk accounts from the definition of “business relationship” – a status that imposes more onerous obligations on reporting entities that conduct financial transactions or provide services related thereto. The Amendments came into force on May 20, 2020.
- Effective June 1, 2020, in addition to entities “dealing in virtual currency”, foreign money services businesses were required to register with FINTRAC.
- On September 14, 2020, the Financial Action Task Force (FATF) published its report on red flag indicators associated with virtual assets (“VAs”), following up on its guidance last year on virtual assets. On December 2, 2020, FINTRAC published guidance on money laundering and terrorist financing red flag indicators for virtual currency transactions. These ML/TF red flag indicators provide useful guidance for businesses dealing in virtual currency to refine their anti-ML/TF compliance strategy. The red flag indicators are comprised of factual characteristics, behaviors and patterns associated with suspicious financial transactions. FINTRAC developed the red flag indicators based on their analysis of ML/TF cases, suspicious transaction reports, input from reporting entities and materials published by international organizations such as FATF. The guidance from FINTRAC follows the report on red flag indicators associated with virtual assets published by FATF.
- On November 13, 2020, FINTRAC issued a Public Notice of an Administrative Monetary Penalty (AMP) against a Québec MSB. This is the first penalty issued under FINTRAC’s new AMP policy since the agency suspended the program following a 2016 Federal Court ruling.
WHAT TO WATCH FOR IN 2021
- On December 15, 2020, Payments Canada published its Modernization Delivery Roadmap December 2020 Update, confirming the expected launch of Lynx in 2021 and RTR in 2022. Lynx is intended to modernize Canada’s high-value clearing and settlement system (LVTS) with an enhanced risk model that complies with Canadian and international risk standards. Lynx will also be opened up to participation by entities affiliated with members of Payments Canada, unlike LVTS. Having experienced an upsurge in 2020 of the use of digital payments and Canadians’ adoption of new ways to pay, the RTR will support this growth with faster, secure and data-rich payments and act as a platform for the introduction of new payment products.
- Canada’s privacy legislation is currently going through legislative reform at both the provincial and federal level, which, if enacted, would result in major changes to Canada’s privacy frameworks. While not addressed here, our Cyber/Data Group has summarized the proposed legislative changes to replace Canada’s federal privacy legislation for the private sector (i.e. the Personal Information Protection and Electronic Documents Act or “PIPEDA”) with the new Consumer Privacy Protection Act (“CPPA”) and the new Personal Information and Data Protection Tribunal Act in this post, and consultations on and proposed bills for legislative changes to the provincial privacy frameworks for the private sectors in BC, Québec, and Ontario. We have also published insights on cross-border transfers of personal information under the new CPPA. These changes will impact businesses across all industries, including Fintechs.
- Certain AML regulation amendments will come into force on June 1, 2021, and will impose additional obligations with respect to beneficial ownership, politically exposed persons, business relationships and ongoing monitoring, among others. On November 16, 2020, FINTRAC published a notice announcing that it will exercise flexibility in assessing and enforcing compliance with certain of the record keeping and reporting obligations related to these amended regulations.
- Effective June 1, 2021, MSBs dealing in virtual currency will need to begin reporting suspicious transactions, maintain virtual currency transaction records for transfers of virtual currency exceeding $10,000 in a single transaction (or several smaller transactions in a 24 hour period), and complete other KYC verification.
- The 2020 federal Fall Economic Statement announced a number of upcoming measures directed to the financial services sector, including further strengthening Canada’s anti-money laundering and anti-terrorist financing regime and clarifying the authority of the Bank of Canada to oversee payment exchanges (in connection with the new retail payments oversight framework). We expect to see more details on these measures in the coming years.