- Canadian securities regulators are proposing a hybrid approach to regulation, which would cover pieces of all of those requirements that impact the traditional players while still ensuring not to stifle innovation in the industry.
- Canadian securities regulators, through regulatory sandboxes and launchpads, have dedicated significant resources to helping fintech businesses navigate existing securities laws, both informally and formally through guidance and exemptive relief.
- Part of the intrigue around cryptocurrency is that it’s intended to be totally decentralized – which ostensibly means no bankers, no lawyers, and no other intermediaries. However, as time has gone on, industry players have come to realize that the law, and therefore lawyers, will have an important role to play in the future of crypto and how it’s regulated going forward.
- It’s important to remember that the use-case behind blockchain technology and the objectives of securities regulation are arguably very much aligned.
- Far too many investors still see cryptocurrency as a sort of get-rich-quick scheme and not enough people are investing because they believe in the underlying fundamentals of the project. As irrational investor behavior subsides over time, entrepreneurs can finally get back to just building products and worrying less about raising as much money as they can, as fast as they possibly can.
- Lawyers are naturally inquisitive people. Cryptocurrency is a brand-new industry, and we have an exciting opportunity to help shape its regulation in the future, which is a very exciting prospect for any lawyer.
Please begin by introducing yourself and telling us a little bit about your firm.
My name is Christian Vieira and I’m an associate with the Corporate Law Group at Stikeman Elliott in Toronto. Our blockchain group prides itself on being at the forefront of Canadian legal developments in transformative blockchain technologies. Recently our M&A, Financial Products and Services and Capital Markets teams have been involved in private placements, reverse takeovers, and ICOs in the blockchain and cryptocurrency industry. This has given us unique insights into the regulatory framework and the considerations faced by blockchain industry lawyers.
When did you, personally, first get interested in blockchain and cryptocurrency?
I was first introduced to cryptocurrency in the fall of 2017, when bitcoin and altcoins were in the midst of their run-up and gaining a ton of media attention. I had heard of blockchain technology before but really didn’t know much about it, and I knew even less about cryptocurrencies, although the potential of the underlying technology was not lost on me.
So, I invested a couple of hundred dollars and started to learn about different cryptoassets in circulation. I registered for accounts with various exchanges and platforms, I went to a few Toronto cryptocurrency conferences and met some very smart people. I even got involved in “Crypto Twitter”, which I found to be quite entertaining, while still being informative about what many people in the industry were discussing at any given time.
Although the returns from my investments didn’t exactly qualify me for early retirement, the hands-on experience I gained from investing in and learning about these assets has opened up a number of professional opportunities for me with Stikeman Elliott to advise clients in the cryptocurrency space.
Yeah, I was lucky enough to be part of a team of very smart lawyers from Stikeman Elliott who put together the Canada chapter which was published in the fall of 2018. It was based, in large part, on guidance papers from the CSA [Canadian Securities Administrators], which is an umbrella organization for Canada’s securities regulators. Those guidance papers focused on cryptocurrency offerings and they were released by the CSA at the height of the ICO and ITO popularity in the winter of 2017-2018.
Those guidance papers suggested that many ICOs and ITOs could be considered securities offerings and thus subject to Canadian securities law requirements, including the requirement to file a prospectus. Since that time, the ICO and ITO hype has obviously cooled down considerably, and as a result, the regulatory attention has shifted somewhat to the buying and selling of cryptoassets on the secondary market, specifically with respect to cryptocurrency exchanges.
The biggest development on that front in recent months is that the CSA, along with IIROC [Investment Industry Regulatory Organization of Canada], released a consultation paper which seeks input from crypto industry participants on the regulatory framework for crypto trading platforms in Canada. This raises a very interesting regulatory question, because when you think about it, cryptocurrency exchanges performed several different functions, many of which are traditionally performed by separate and distinct industry participants.
For example, cryptocurrency exchanges take on roles of traditional exchanges but they also take on the roles of dealers, custodians, clearing agencies, and many other providers. So, as a result, Canadian securities regulators are proposing a hybrid approach to regulation, which would cover pieces of all of those requirements that impact the traditional players, while still ensuring not to stifle innovation in the industry. With that said, there are some risks that are specific to crypto which the regulators want to address in the proposed regulatory framework. Those include custody, price determination, market surveillance, conflicts of interest, insurance clearing and settlement – just to name a few.
Would you consider Canada a crypto-friendly destination?
I would definitely consider Canada to be a crypto-friendly destination. The CSA, through its regulatory sandbox and launchpad, has dedicated significant resources to helping fintech businesses navigate existing securities laws, both informally and formally through guidance and exemptive relief. These resources help industry players understand the regulatory hurdles facing them going forward so there are no costly and unforeseen obligations along the way. In the crypto-space specifically, we have seen a number of companies take full advantage of this assistance in recent years, including with respect to coin and token offerings, as well as some cryptocurrency investment funds.
Anecdotally, our comparatively low electricity costs, particularly in the more remote areas of Canada, created somewhat of a hub for bitcoin mining activities. So, the mining space is also something to look out for in Canada and something which makes Canada a very crypto-friendly destination more generally.
Let’s ascend into the world of ideas and ideals. If you were tasked with creating a perfect regulatory regime for cryptoassets, what would its key features be?
It’s funny that you ask… because when I first became interested in cryptocurrencies and began speaking with people in the industry, many would scoff when I mentioned that I’m a securities lawyer. After all, part of the intrigue around cryptocurrency is that it’s intended to be totally decentralized – which ostensibly means no bankers, no lawyers, and no other intermediaries. However, as time has gone on, I think these same industry players have come to realize that the law, and therefore lawyers, will have an important role to play in the future of crypto and how it’s regulated going forward.
In my opinion, the regulatory regime for cryptoassets is going to require an approach that balances the traditional regulatory imperatives that protect investors, while still ensuring that it fosters innovation and flexibility in what is still a very nascent industry. Given the unique risks facing cryptocurrency investors, like the ones I mentioned already, the regime needs to consider additional protections to address those risks.
I mentioned the CSA and IIROC consultation paper; the important thing to note about that paper is that it solicits feedback not only from the lawyers but from all industry participants, including those on the technical side of things. While the approach and the paper are promising, industry participants who understand the technology and functionality need to participate, so that the outcomes are actually practical and workable.
When it comes to finding a balance between regulatory certainty and encouraging innovation, what are the major issues that need to be considered?
I think it’s important to remember that the use-case behind blockchain technology and the objectives of securities regulation are arguably very much aligned. The Ontario Securities Commission’s mandate is to provide protection to investors from unfair, improper, or fraudulent practices and to foster fair and efficient capital markets and confidence in their integrity. Blockchain is designed to achieve precisely this objective but by proposing a solution to the problem of trust, namely that blockchain participants themselves, and not some third-party intermediary, are vested with the responsibility of validating the integrity of the whole.
As you mentioned, there has to be a balance, and just like any other asset class, there’s always going to be an apparent dichotomy between fostering fair and efficient capital markets and encouraging innovation. So, on the one hand, it’s important to consider the sophistication of cryptocurrency investors. Given what is generally believed to be a lack of institutional involvement in the crypto sphere, the majority of cryptocurrency purchases occur on an individual or retail basis and often using unregulated crypto exchanges or platforms.
Last year, the Ontario Securities Commission reported that nearly 10 percent of Ontarians either owned or previously owned cryptoassets – while only 5 percent were very familiar with cryptoassets and could explain them in detail. I mentioned that I spent some time on “Crypto Twitter”, where I would see people writing about their investments of many thousands of dollars in cryptocurrencies that they knew absolutely nothing about other than a nameless Twitter avatar suggesting that the coin would go up a hundred times in the next two weeks. This is obviously not a sustainable situation and more needs to be done to protect investors.
Increased regulation is one way to help protect investors from those situations. On the opposite side of the coin, the reason why many enterprises opted to raise money using ICOs and ITOs is that they offer access to a wider range of investors. In Canada, even with crowdfunding, and other private placement exemptions under securities laws generally, retail investors still find themselves unable to access investment opportunities due to regulatory restrictions. ICOs and ITOs provided access to investors or dealers that otherwise may not have been available to them under traditional private placement offerings. By imposing onerous securities law obligations on those entities, their access to capital is limited and it’s very possible that those limitations could stifle innovation.
What information should people who wish to get involved in the crypto-sphere in Canada seek?
From a regulatory perspective, as I mentioned earlier, the CSA has made a point of engaging and working with cryptocurrency participants to help them navigate the existing regulatory requirements. They’ve released a number of resources that should be reviewed and understood by cryptocurrency companies looking to operate in Canada. The Ontario Securities Commission has even created a webpage focused specifically on cryptocurrency which is beneficial to companies and investors. I’d also like to think that commentaries and publications such as those published by my teammates at Stikeman Elliott are helpful to industry participants. Lastly, I’d even recommend going to the many cryptocurrency and blockchain events or speaker series that take place in Canada on a regular basis.
As a lawyer, what benefits could you envision emerging as cryptocurrency and blockchain adoption increases?
I think there are many advantages to the wider adoption of blockchain technology. Specific use cases? Supply chain, back-end operations for financial markets, shipping, healthcare… things like that. Blockchain is not the solution for everything, but it can successfully be applied to use cases where multiple parties need access to the same information, and it does a great job of bringing that information and parties together.
Cryptocurrency also has advantages and, depending on the intended use of the asset, it can be of great benefit. For example, cryptocurrency can serve well in countries with hyperinflation, if it’s intended to be used as a means of storing value and exchange. Crypto can help solve problems that exist today and not just 10 years down the road.
Capital market activity in the blockchain space has obviously declined significantly from early 2018. However, I think it’s clear that the winners in this space have been those blockchain entrepreneurs who have recognized that there is an enormous investor appetite for blockchain technology. They’ve indulged that appetite through the use of traditional capital markets and by using traditional capital raising methods and the services of investment banks and providers such as those. As I mentioned previously, the Canadian securities regulators appear open to supporting appropriate initiatives at both provincial and federal level. We understand that there are various programs underway looking at how to support and be a part of the industry.
I wanted to ask you to play a prophet here a little. Where do you envision the level of blockchain and cryptoassets adoption will be in 10 years from now?
That’s the million-dollar question. At the peak of the cryptocurrency hype last year, I heard many people compare the rise of blockchain technology to that of the Internet 20 years ago. I’m not convinced that adoption of cryptocurrency, or even blockchain technology, can quite reach that level but I think that the benefits of this technology are simply too great to be ignored. We’re already seeing blockchain technology have a massively positive impact on enterprise technology, and many academic institutions are offering courses on blockchain technology and cryptocurrencies, which is really going to help bring those technologies into the mainstream.
From the perspective of crypto specifically, the reality is that far too many investors still see cryptocurrency as a sort of get-rich-quick scheme – not enough people are investing because they believe in the underlying fundamentals of the project. But as the irrational investor behavior subsides over time, which I think is already happening after the lows of 2018, entrepreneurs can finally get back to just building products and worrying less about raising as much money as they can, as fast as they possibly can. In addition, as more institutional investors enter the space, it’s going to help cryptocurrencies gain widespread credibility, which will also be hugely beneficial for mass adoption going forward.
Forbes recently reported that an Australian white paper titled “Blockchain for Lawyers” received over 1.7 million views. Why do you think there is so much attention on blockchain in the legal community?
I can’t tell you how many articles I’ve read on blockchain technology which list lawyers as the number one group of professionals that blockchain is going to help to replace in the future. So, perhaps a big chunk of that is from viewers like myself, who are scared if they’re going to have a job in five years. But in all seriousness, I do think there are a few ironclad reasons for this. Most importantly, lawyers are naturally inquisitive people, cryptocurrency is a brand new industry, and we have an exciting opportunity to help shape its regulation in the future, which is a very exciting prospect for any lawyer – including those working in securities, banking, finance, and technology – so many practice areas will be shaped by the regulations that come through over the next couple of years.
It’s also such a new and exciting area of the law and one which provides young lawyers like myself with the chance to become experts in an area of the law which is very unfamiliar to many of my more senior colleagues. As for the practice of blockchain and cryptocurrency law, I’m not familiar with any stand-alone practices in those areas in Canada but I will say that, as you may have gleaned from everything I’ve said today, there are so many different legal disciplines that affect cryptocurrency participants, and I would argue that firms with deep multidisciplinary expertise in tackling these complex issues will likely have an advantage going forward. Quite often the legal issues facing cryptocurrency companies go far deeper than simply the assets themselves.
Listen to the full interview on Coinlaw Podcast