Crypto in Canada: Where are we today, and where are we heading?

Digital currencies are quickly becoming more mainstream within the Canadian financial landscape. Alongside this increased adoption, Canada has been relatively successful at creating a stable regulatory environment. In 2014, Canada established itself as a leader in the global digital asset space when the Canadian Parliament became the first government in the world to pass a national law on digital currencies. Since then, Canadian regulators have remained fairly proactive in their approach toward cryptocurrency, taking a cautious-yet-optimistic stance in an attempt to promote innovation while still protecting investor interests. 

Regulatory support for digital asset innovation

Especially in comparison to other international jurisdictions, which either impose stricter policies or harbor a more laissez-faire attitude, Canada’s supportive environment to cryptocurrency is reflected in some of the options offered to startups experimenting with digital asset technology.

For example, the Canadian Security Association’s (CSA) sandbox initiative supports financial technology (fintech) businesses seeking to offer innovative products by carefully vetting business models in live-testing environments. Similarly, the Ontario Securities Commission (OSC) LaunchPad works with financial service businesses to keep regulation aligned with digital innovation and encourage the development of products, services and applications that meet compliance standards required by securities laws.

In addition to these services aimed at innovators looking to collaborate directly with financial authorities in the context of their specific business model, regulators have also published broad, but comprehensive, guidance on navigating applicable legislative frameworks.

Related: Will regulation adapt to crypto, or crypto to regulation? Experts answer

The dichotomy of digital asset regulation

The need for regulation has polarized the crypto industry ever since its inception. Investors and enterprises are hungry for processes, for which having a regulatory framework is a must. On the other hand, an over-regulated economy might isolate Canadians from integrating with the broader digital asset industry, forcing investments overseas. So, what is a good balance between the two?

Early advocates of blockchain presumed that its distinctive qualities of disintermediation make it insusceptible to regulation and argued that cryptocurrency had been created as a solution to the stringent public oversight of financial markets. Under this assumption, many token issuers before mid-2017 largely ignored securities law registration requirements meant to protect investors and foster fair markets.

However, reliable legal remedies are necessary for the protection of individual rights and are integral for a functionally accountable jurisdiction. Especially within the financial sector, where individuals are extremely vulnerable to risk, regulation minimizes consumer exposure to harm and is paramount for maintaining market integrity.

For example, it is now well established that Canadian businesses dealing with cryptocurrency (such as crypto exchanges) must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as a money services business (MSB). Registration means that these enterprises are subject to regulatory oversight and reporting requirements. As a result of these legislative obligations, fraudulent actors are more likely to be squeezed out of the space to make room for lawful players who can provide higher levels of investor protection. This legitimization of the digital asset industry is primarily why trading platforms are welcoming progressive regulation; working constructively between one another to increase security and transparency without stifling an industry that is still in its infancy.

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Therefore, policymakers play an essential role in developing the necessary conditions to create a suitable framework for cryptocurrencies to operate safely. The CSA jurisdiction, along with the Investment Industry Regulatory Organization of Canada (IIROC), has expressed its interest in working closely with digital asset trading companies to understand their point of view, factor in key risks to innovation and ensure that investor protection is not compromised.

Regulations of this magnitude cannot be rushed, and several factors have been taken into account by regulators to ensure that any new legislation only encourages the digital asset industry to boom. Allowing Canada to operate as a successful crypto venue while safeguarding investment security and fraud prevention are some of the key elements of the proposed regulatory framework. The sweet spot for regulation is somewhere in between — stringent enough to protect investments and fraud, and permissible enough to allow private and international digital asset companies to thrive.

Related: How smart regulation can improve the future of blockchain

Canadian regulatory trends in 2021

When it comes to the integration of crypto into traditional investing, Canada has been remarkably advanced with its sanctioning of Bitcoin (BTC) and Ether (ETH) exchange-traded funds in 2021, allowing more mainstream investors the opportunity to have digital asset exposure through their investment accounts, including tax-advantaged registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

Canada also surpassed the United States by allowing digital asset exchange-traded funds (ETFs), setting a precedent of wanting to be competitive in the sector. In February, Purpose Financial LP’s Bitcoin ETF accumulated over $400 million assets under management within its first two days and went on to cross the $1 billion mark within two months post-launch.

With a growing portfolio of investments, one would assume that tax-related concerns could potentially arise. However, Canadian tax authorities have been fairly clear in matters of tax implications and have provided adequate guidance to investors along the way. Currently, Canada’s tax laws and rules, including the Income Tax Act, also apply to cryptocurrency transactions.

The Canada Revenue Agency has characterized cryptocurrency as a commodity and stated that the use of cryptocurrency to pay for goods or services should be treated as a barter transaction. Because cryptocurrency is treated as a commodity, it has prevented the unfavorable misreporting of taxes as a result. However, the landscape is constantly evolving, so regulators must remain ahead of the game to avoid crypto enthusiasts looking at the United States, Europe or Asia as alternative playgrounds, draining Canada of both its talent and its investment.

Related: Stablecoins present new dilemmas for regulators as mass adoption looms

Canada stays ahead as a miners’ paradise

Canada is a crypto miner’s top choice, owing to its climate, electric supply and light regulation. Hardware used by cryptocurrency miners generates a significant amount of heat and requires cooling to prevent overheating, and being located in a relatively cool climate like Canada helps to reduce the costs of cooling the computers. Furthermore, power rates in Quebec are among the lowest in North America. For industrial consumers, rates are around $0.05 per kilowatt-hour. Energy consumption is the main cost of cryptocurrency miners, and understandably the top reason they’re drawn to Canada.

Finally, there is potential for Canadian digital asset companies to not just offer trading but also own and operate crypto mining facilities. Canada offers a safe haven for miners coming from politically and financially unstable environments to carry out operations within a relaxed framework, putting the country at the forefront of the digital currency revolution. Miners from previously heavy crypto quarries like China are on the lookout for favorable pastures with less hostile regulations and are now looking at Canada as a lucrative alternative.

Thinking long term, there is also the sentiment of sustainability, and while traditional finance industries lean on carbon-based energy sources, digital assets are comfortably moving in the direction of greener energy. This is further confirmed by Square’s report on the Bitcoin Clean Energy Initiative — a unique energy model that could enable the installation and capacity of more sustainable methods of solar and wind generation. Canada is a global leader in sourcing renewable energy, and a flexible regulatory framework around cryptocurrency could mean an influx of international players heading to “The True North.”

Related: Ignore the headlines — Bitcoin mining is already greener than you think

What does the future hold for crypto regulation?

With the digital asset space being internet-native, fintech platforms can be built anywhere in the world. This globalization of the financial industry means that Canada cannot simply wait for a regulatory framework to become available, or it will lag behind in the innovation race. The onus is on regulators to incentivize digital asset investment and project development in their country.

Familiarizing the Canadian market with digital asset trading with the introduction of more crypto-asset trading platforms is a solid first step. The next decade will see a lot more regulation introduced into the sector. Governments that are smart and forward-thinking will see an obvious opportunity to offer clear but not overly restrictive regulation, and become a welcoming place for digital asset projects.

Historically, authoritarian governments — where hostile and unstable rule-making induces a net negative to their economy — are more likely to impose stricter measures on digital assets, which could inevitably force industry participants to move to countries like Canada that offer relatively favorable conditions. Digital asset companies will continue to move to wherever they are most welcome, and the countries that facilitate these moves will be much better positioned to reap the benefits of the digital asset industry as it continues to grow and threaten traditional finance.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.