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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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NCFA Jan 2018 resize - Canadian Crypto Industry is Working Towards LegitimacyThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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