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Canadian Crypto Industry is Working Towards Legitimacy

DLA Piper | Don Collie, Ryan J. Black, Saje Gosal | Aug 19, 2022

Crypto securities vs commodities in Canada - Canadian Crypto Industry is Working Towards LegitimacyWhich tokens are securities?

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Defining “security” in Canada

  • In Canada, securities laws take a “catch and release” approach by providing a wide definition of ‎‎“security”, but including numerous exceptions based on the policy purposes of enforcing the rules.
  • Currently in Canada, crypto assets are generally taxed as commodities.
  • Whether a particular asset is a commodity or a security will likely depend on a number of factors, including the ways in which network revenues or fee generation can be attributed to a token (an expectation to profit), whether the mechanism through which validators secure the network is sufficiently decentralized, and whether there is a central third party operating the network and making decisions (depending upon the efforts of third parties).

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  • Regulators typically apply the test found in Pacific Coast Coin Exchange ‎of Canada v Ontario (the “Pacific Coast test”):
    • ‎an investment of money;
    • ‎with an intention or an expectation of profit;
    • in a common enterprise in which the fortunes of the investor are interwoven with and dependent  upon ‎the efforts and success of those seeking the
    • investment or of third parties; and
    • ‎where the efforts made by those other than the investor are undeniably significant, essential ‎managerial efforts which affect the failure or success of the enterprise.

Enforcement action

Two recent decisions of the Ontario Securities Commission’s (the “OSC”) Capital ‎Markets Tribunal (the “Tribunal”) have shown how securities regulators are applying their guidance.

See:  OSC Publishes Statement of Allegations Against KuKcoin For Failing to Comply with Ontario Securities Law

The Tribunal reached a settlement agreement including a comprehensive undertaking with Bybit Fintech Limited (“Bybit”), and filed administrative penalties, a cease trade order and a permanent ban on Mek Global Limited and PhoenixFin Pte Ltd (collectively, “KuCoin”) for failing to begin conversations around registration and regulation with the OSC by their stated deadline.

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