Law Times

Page 8 August 6, 2018 • LAw times www.lawtimesnews.com Regulations about crypto-currencies remain uncertain BY MEAGAN GILLMORE For Law Times L awyers are keeping a close eye on regulations about crypto-currencies, while advising more businesses about how to use the technology. According to a recent pa- per published by the Bank of Canada, almost three per cent of Canadians owned Bitcoin, the most well-known digital cur- rency, at the end of 2017. Part of the appeal of block- chain, the technology used to make Bitcoin and other crypto- currencies, is an example of dis- tributed ledger technology. Blockchain can be useful for businesses because it allows them to process many transac- tions quickly with fewer costs, says Usman Sheikh, partner and national head of the blockchain and smart contract group at Gowling WLG (Canada) LLP in Toronto. "Many businesses have taken a look at the technology itself and have seen that it can be em- ployed in a quite revolutionary way to change the underlying fabric of their usual transactions to do things quicker, more effi- ciently, in a less complex way at a far lower cost," he says. Sheikh has been working in this field for about three years and says work related to block- chain and crypto-currency oc- cupies about 80 per cent of his time. "It's almost every day that you see a new project being intro- duced," he says. Some companies believe dis- tributed ledger technology will be more transformative than the internet was, says Carol Derk, a partner at Borden Ladner Ger- vais LLP in Toronto, who has seen blockchain used in various ways from supply chain man- agement to heatlh care to chari- ties. Blockchain is a way of stor- ing data in a peer-to-peer way, says Tracy Molino, counsel in Dentons LLP's Toronto office, who writes often about financial technology, including crypto- currency and distributed ledger technology. Transactions are recorded in a series of blocks that are chained together, says Molino. The decentralized nature of it means "every person in the blockchain ecosystem has the same copy of all of that trans- action history and all of those blocks at any given moment," she says. They can also see the com- plete history of the transactions, she says. Blockchain and other distrib- uted ledger technologies allow parties to transfer funds without traditional trusted intermediar- ies, such as banks or clearing and settlement agencies, says Sheikh. "Crypto-currency is really the exact opposite [of fiat cur- rencies]," says Molino, referring to traditional legal tenders, such as the Canadian dollar or euros. "Its value is not derived from a trusted government authority. It's really being driven a lot more by supply and demand and other market forces." Crypto-currencies can look like many different things, says Molino, so it can be difficult to determine if it's a currency or a security and, as a result, how it should be regulated. "It falls into an uncertain place in Canada from a regula- tory perspective," she says. "It's a little bit like putting a square peg in a round hole," says Derk. "[Regulators] look at some of these coins and tokens and say, 'They're securities and, therefore, you must comply with securities legislation,' and in many instances that makes sense. "But for many of them, it does not make sense, but we don't have yet developed specific crypto-currency legislation that we could look to for guidance." Canadian investors need to analyze if coins they purchase from non-Canadian companies are securities or not. "If it isn't a security, we're looking at something that doesn't have a lot of guidance," she says. If businesses want to use crypto-currency internation- ally, they need to remember that many areas of law are involved, says Sheikh. "It's a horizontal technology that very much impacts count- less vertical industries and many vertical areas of law. It will im- pact securities law," he says. "It will impact banking law, tax law. Each one of those areas of law are trying to grapple with the application of their respec- tive legal regimes with this new technological development." The Canadian Securities Ad- ministrators published Staff No- tice 46-308 in June about offer- ings of coins and tokens to help clarify when coins and tokens can be considered a utility and when they are a security. But these guidelines don't give clear regulations. "There aren't any prescriptive rules that we can clearly turn to," says Derk. Regulations about crypto- currencies vary in different countries, says Molino. Canada introduced chang- es to the Proceeds of Crime (Money Laundering) and Ter- rorist Financing Act that would have expanded the definition of money service businesses to in- clude dealers in virtual currency, but that hasn't been declared in force, she says. "The best we can do is stay in- formed about regulatory trends in other countries and work with a wide network of experts," says Molino. Lawyers also need to deter- mine what exactly their clients want to do, she says. They may want to use block- chain to solve a problem and crypto-curency may have noth- ing to do with their situation. "It's important to ask your client the question about what they're trying to do," she says. "Is your client really coming to you with a technology question or a crypto-currency question?" LT Usman Sheikh says it's 'almost every day that you see a new project being introduced' related to crypto-currencies. FOCUS FOCUS ON International & Cross-Border Law What's your biggest management challenge? Growth? Recruiting? Legal costs? Weigh in on these issues and more in our annual corporate counsel survey. Survey is open August 8 – September 10 canadianlawyermag.com/surveys ATTENTION IN-HOUSE COUNSEL! T H E A N N U A L Presented by CORPORATE COUNSEL S U R V E Y Untitled-3 1 2018-08-02 3:27 PM

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