The Future of Digital Assets in Canada: The Importance of Protecting Consumers

Cryptocurrencies and digital assets are rapidly gaining traction worldwide, prompting governments to establish regulatory frameworks to manage their impact on financial systems and protect consumers. Canada is experiencing a swift evolution in its regulatory landscape for digital assets, driven by the need to balance fostering innovation with managing risks. Consequently, Canada’s approach is being closely monitored and praised by global industry observers. This article examines the current state of digital asset regulation in Canada, explores the challenges and opportunities, and outlines the strategic steps necessary for Canada to assert its leadership on the global stage.

What Does the Current Regulatory Landscape Look Like in Canada?

In Canada, cryptocurrency and digital asset regulation falls under the jurisdiction of provincial authorities.  Key regulatory bodies, such as the Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC), play a pivotal role in overseeing digital asset trading. The goal is to protect investors from fraud and other illicit activities. In furtherance of that goal, cryptocurrency businesses must comply with provincial securities laws and money services laws, including the registration requirements outlined in National Instrument 31-103, which mandates that entities involved in trading securities, including cryptocurrencies, register with the relevant provincial securities commissions.

The regulatory landscape is quickly evolving, with companies like Blockchain Intelligence Group (CSE: BIGG) playing a pivotal role. For instance, our sister company, Netcoins.ca, worked in a sandbox with the BCSC to provide insights on the regulatory framework for cryptocurrency exchanges. This collaborative approach ensures that the regulations balance fostering innovation and managing consumer risks in the digital asset space.

In Canada, many agencies have a role to play in innovating and regulating cryptocurrencies. The CRA, BCSC, OSC, FINTRAC, and OSFI are on the shortlist. The list is incomplete, and many other agencies are involved as well. Regardless of the agency, its mandate is to interpret and enforce a slew of laws and policies, such as the Personal Information Protection and Electronic Documents Act (PIPEDA) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) as they related to cryptocurrencies.

The OSC has introduced pre-registration undertakings for cryptocurrency trading platforms (CTPs). These platforms must comply with requirements similar to those for registered CTPs, including due diligence measures, custody of client assets, insurance, risk disclosure, and regulatory reporting. This approach aims to enhance investor protection while the platforms work towards full registration.

The Office of the Superintendent of Financial Institutions (OSFI) has released interim guidelines for federally regulated financial institutions (FRFIs) engaging with crypto assets. These guidelines include capital and liquidity requirements, risk management protocols, and exposure limits. FRFIs are expected to prudently manage their crypto asset exposures and notify OSFI before commencing cryptoasset activities.

Opportunities and Challenges in the Future of Digital Assets

Canada has proven that it is positioning itself as a leader in the digital assets space by promoting innovation alongside solid regulatory oversight. Blockchain technology, which underpins cryptocurrencies, offers significant advantages such as faster and more efficient transaction settlement, reduced counterparty risk, and enhanced transparency. However, more needs to be done to protect consumers from illicit actors that target the strengths of blockchain technology used in cryptocurrencies, such as pseudo-anonymity and irreversible transactions.

Robust consumer protection frameworks are vital for building trust in digital assets, including precise disclosure requirements, conflicts of interest management, and ensuring the security of customer assets held in custody. When you open an account with an exchange in Canada, you need to answer questions about your investment experience and knowledge, whether you are borrowing money to buy crypto, and a number of other questions that are asked every quarter to provide as much protection as possible.

Addressing Criminal Activity

The proliferation of digital assets has also increased criminal activities, such as fraud, money laundering, romance scams, investment scams, and cybercrime. Practical enforcement actions and transparent regulatory frameworks are necessary to deter such activities and protect consumers. Recent high-profile cases, such as the FTX fraud and the Terra Luna crash, underscore the urgent need for stringent regulatory measures. Collaborating with international bodies can help harmonize regulations and address the cross-border nature of digital assets.

Education is a critical factor in stopping cryptocurrency scams

One of the most crucial things Canadians can do is familiarize themselves with the hallmarks of cryptocurrency scams. Here are a few examples of how an illicit actor will use social engineering to gain your trust, provide a file that will infect your computer, and allow them to access your personal computer and/or work environment.

We had a number of small-cap CEOs who were looking for investment, and the group stated they had contacts who wanted to invest in their company. They then state their finder’s fee has to be paid in crypto, and when they send the finder’s fee document, the document is infected with a wallet drainer malware. These CEOs even reached out to the Toronto Stock Exchange to make sure it was legal to pay these finders fees in crypto, and the response was yes. The truth is, nobody really knows the scammer’s tactics taking place. The CEOs are instructed to open an account with a cryptocurrency exchange and transfer the funds to a Metamask or ledger wallet on their company computer that was previously infected with malware. They will then transfer the balance of funds to this new wallet to make the final transfer to the illicit actors (supposed Investment Banks). Once the funds have been transferred, the virus runs the wallet drainer script. This script allows the deployer to define the threshold of funds that must be in the account before it is active and a destination address to move the funds to.

Highly Skilled and Organized Transnational Crime

Investment scams and romance scams are devasting Canadian and American consumers. This is pure organized crime and, most often, originates out of the APAC region. The victim is contacted and developed (fattened up like a pig for slaughter), and then they are told about a cryptocurrency investment that has returns that are so promising the victim cannot resist. The victim is led to a fake investment website where, once funded, the victim’s account shows they are getting massive returns, leading to more cryptocurrency investment. Of course, most people will leave the funds there for a few months or longer because they are compounding and fall into the trap of greed. The final sting occurs when the victim wants to withdraw funds, only to find out they must pay a fee to withdraw. The reality is that their funds were already moved the moment they transferred them (cryptocurrency), and what they had been seeing in their account was completely fake. The scam is complete, and contact is broken off.

I believe consumers need the same risk detection tools that banks, exchanges, OTC desks, and ATM operators use. This way, consumers can tell if companies like ours know anything about the wallet or address. Suppose it says investment scam, you know not to send the money.

Depending on how much money you plan on storing in cryptocurrency, some excellent advice for accessing a non-custodial wallet is to use a clean machine—a computer that you only use to access your wallet. Do nothing else on this machine. Do not surf the internet, install apps, or plug in USB keys (besides your wallet if it’s like a Ledger or Trezor), as this will significantly increase the chances of it not being infected. Always use 2-factor authentication when using a centralized exchange or software wallet.

Contact your cellular carrier and ensure your SIM card can only be changed in the store, as you will then have to present ID.

Never share your private keys; always verify individuals who say they work for a company.

This kind of education and tools can empower and protect a company or individual from the common mistakes the industry has repeatedly seen. These scams affect not only the company or individual but also their related parties and the country they are from. Check when they registered their domain name. Enter their name in Google to see what others have said.

A good rule to follow when transferring crypto is to send a microtransaction.

In cryptocurrency transactions, you cannot reverse a transaction. Therefore, when sending funds to a new wallet, especially if it’s a considerable amount of funds, such as in the case of the finder fee mentioned above (USD 400K), you should first send a micro-transaction of 10 cents or something nominal to ensure the address is accurate.

What are the Next Steps for Canada’s Digital Assets Space?

Canada must continue to enhance its regulatory frameworks to remain competitive and secure in the global digital assets market. This includes updating existing laws to address the unique challenges posed by digital assets and ensuring their consistent application across provinces.

Given the global nature of digital assets, Canada should intensify collaboration with international regulatory bodies to develop harmonized standards and share best practices. This will help mitigate the risks associated with cross-border transactions and regulatory arbitrage. An excellent example would be Hong Kong, where any new coin or token must be traded elsewhere for at least one year.

Industry-driven standards, in conjunction with regulatory mandates, can enhance the reliability and security of digital assets. Establishing clear guidelines for interoperability, cybersecurity, and operational resilience will support the sustainable growth of the digital assets sector.

Encouraging innovation within a robust regulatory framework will enable Canada to harness the benefits of digital assets. This includes supporting research and development, providing regulatory sandboxes for testing new technologies, and fostering public-private partnerships to drive advancements in the digital economy.