Bitcoins are a digital currency and have become widespread on the Internet and some companies have begun to accept these items as payment for real goods and services. At the time of writing, Bitcoins are not explicitly and specifically governed by any laws or litigation and to our knowledge, no Canadian regulator has publicly taken a position as to whether or not Bitcoins should be regulated and if so, how.
However, while there is no certainty at this stage, the sale (or exchange) of Bitcoins may fall under the scope of “Money Services Businesses” because they may be considered:
- money; or
If so, Bitcoins may trigger the application of the laws regulating money services businesses including anti-money-laundering laws and rules governing foreign exchange. Regulators in charge of implementing those laws, especially securities regulators and the Financial Transactions and Reports Analysis Centre of Canada (FTRAC), have significant powers that allow them to interpret broadly to include Bitcoins in their fields of application.
In Québec, money-services businesses are subject to several obligations such as:
- holding a license;
- paying annual fees;
- being of good moral character;
- verifying the identity of its customers;
- maintaining records and registers;
- and filing of prescribed reports,
- documents and statements
Under federal legislation, money services businesses must register with the FTRAC. In addition, they have several obligations such as: taking specific measures to ascertain the identity of individuals and entities with which they are dealing; as well as reporting and record keeping requirements. In addition, if the money services businesses are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, they must report:
- suspicious transactions;
- possession or control of property that is owned or controlled by or on behalf of a terrorist or terrorist group;
- large cash transactions involving amounts of $10,000 or more received in cash; and
- international electronic funds transfers of $10,000 or more, including the transmission of instructions for a transfer of funds made at the request of a client through any electronic, magnetic or optical device, telephone instrument or computer
In addition, although not obvious, Bitcoins could be considered a “security” or a “derivative” under applicable securities legislation. As a consequence of that interpretation, in order to move forward with the Bitcoins activities, you would have to comply with all obligations of securities issuers or distributors, which may entail dealer registration, prospectus delivery and other requirements, unless exceptions are available.
Finally, if you perform Bitcoins activities, you may also have to comply with consumer protection legislation in each of the provinces in which your clients are located. For instance, the Consumer Protection Act (Québec) (CPA) governs all contracts entered into with consumers via the Internet (i.e., without being in the consumer’s presence). The CPA provides that a merchant must disclose specific information in a certain format before entering into such a contract.
Given the high degree of uncertainty in Canada with respect to carrying out Bitcoins activities and given the resulting high degree of legal risks associated with Bitcoins, in our view the most appropriate way to mitigate these risks is to consult with the relevant regulators in order to obtain prior approval or guidelines before carrying out Bitcoins activities.