Canada implements world’s first national digital currency law; regulates new financial technology transactions

On June 19, 2014, the Parliament of Canada approved the world’s first national law on digital currencies, and certainly the world’s first treatment in law of digital currency financial transactions under national anti-money laundering law.

Canada’s Governor General gave Royal Assent to Bill C-31, An Act to Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014 and Other Measures (“Bill C-31“). Bill C-31 amends Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (“PCMLTFA“) to legislate over digital currency financial transactions as a matter of anti-money laundering law.

Five Key Changes

The five most important aspects of Bill C-31 as they relate to digital currencies (such as Bitcoin) are as follows:

  1. Regulates digital currencies as MSB – Digital currency dealing, more specifically referred to as “dealing in virtual currencies” in Bill C-31, will be subject to the record keeping, verification procedures, suspicious transaction reporting and registration requirements under the PCMLTFA as a money services business.
  2. Does not define “dealing in virtual currencies” – The phrase “dealing in virtual currencies” was not defined and it is not known what the defined term will encompass in terms of transactions but the government has clarified that it will apply only to digital currency exchanges (“Digital Currency MSB“).
  3. Registration with FINTRAC – Digital Currency MSBs will be required to register with FINTRAC and if successfully registered, to implement a complete anti-money laundering compliance regime.
  4. Captures foreign Digital Currency MSBs targeting Canada – Bill C-31 extends to: (a) entities that have a place of business in Canada; and (b) entities that have a place of business outside Canada but who direct services at persons or entities in Canada. Digital Currency MSBs in Canada, however, that provide services to persons or entities outside of Canada are exempt from Bill C-31 for those external services.
  5. Prohibits banks from opening accounts for Digital Currency MSBs if unregistered – Under Bill C-31, banks will be prohibited from opening and maintaining correspondent banking relationships with Digital Currency MSBs that are not registered with FINTRAC.

Under Canadian law, the fact that legislation received Royal Assent does not necessarily make it in force. Certain parts of Bill C-31 come in force on dates set in the Bill, and others come in force on a date determined by the Governor General.

The Details

Pursuant to the amended PCMLTFA, Digital Currency MSBs will be required to undertake the following obligations:

A. Report Suspicious Transactions

Digital Currency MSBs will be required to report to FINTRAC every suspicious financial transaction and attempted suspicious financial transaction. There is no monetary threshold (i.e., dollar amount) that triggers the requirement to report a suspicious transaction.

B. Report Terrorist Property Transactions

Digital Currency MSBs will have to file with FINTRAC, a terrorist property report when it has property in its possession or control that it knows is owned or controlled by or on behalf of a terrorist or terrorist group; and when it has property in its possession or control that it has reason to believe is owned or controlled by or on behalf of a listed person.

C. Large Cash Transactions

Digital Currency MSBs will be required to report to FINTRAC when they receive an amount of $10,000 or more in cash in the course of a single transaction, unless the funds are received by a public body or a financial entity.

D. Electronic Funds Transfers

The Digital Currency MSB will be required to report to FINTRAC when it sends out of Canada at the request of a person, an electronic funds transfer of $10,000 or more in a single transaction or receives from outside Canada at the request of a person, an electronic funds transfer of $10,000 or more in a single transaction.

E. Politically Exposed Persons

When a Digital Currency MSB sends or receives an international money transfer of $100,000 or more, it must determine if it involves a politically exposed person (“PEP“) inside or outside of Canada, and if it determines that the funds involve a PEP, it must confirm the source of funds. Determining PEPs is a difficult part of anti-money laundering compliance because the obligation is a worldwide one.

 

 

F. Ascertaining ID

Digital Currency MSBs will have to undertake obligations to ascertain the identity of persons and companies using their services to complete certain financial transactions.

G. Records Retention

Digital Currency MSBs will be subject to fairly onerous record-keeping obligations under the PCMLTFA.  They must keep large cash transaction records, records regarding third parties when certain transactions are conducted for third parties.

H. Risk Assessments

Digital Currency MSBs will have to undertake a risk assessment to evaluate and identify, in the course of its activities, the risk of the commission of money laundering offences and terrorist activity financing offenses.

Risk assessments should involve an analysis of potential threats and vulnerabilities to money laundering and terrorist financing crimes to which the business is exposed.

I. Compliance Regime

Digital Currency MSBs will be required to implement a compliance program to meet reporting, record keeping and client identification obligations under the PCMLTFA.  A compliance program is intended to help ensure that a Digital Currency MSB has an ethical and compliant culture, and to minimize risks to the business and its directors, officers and employees of criminal, civil or administrative liability.

J.   Criminal Offences, Fines, Penalties and Imprisonment

The offence provisions under the PCMLTFA are important to be cognizant of. Some obligations apply to the Digital Currency MSB and others apply to employees. Failures to comply with certain obligations under the PCMLTFA are criminal offences and can subject directors, officers, employees and the Digital Currency MSB to terms of imprisonment and fines. Digital Currency MSBs should obtain compliance advice in respect of their exposure and should understand the connection in Canada between the compliance regime and a due diligence defence.

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