Late last week, Bill C-31, the omnibus budget implementation bill, received Royal Assent and became law. Included in Bill C-31 were amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act of 2000 that seeks to bolster the country’s domestic AML policies and counter-terrorist financing (CTF) protections.

Most notably for the bitcoin ecosystem, Bill C-31 will likely apply a broad range of reporting requirements and penalties to the crypto-community through its inclusion of ‘dealers of virtual currency’ in the updated definition of money service business (MSB).

The regulations have potential implications for foreign operators seeking to serve Canada as well, though the biggest impact will be on the domestic ecosystem, which is still striving to come to terms with the new realities potentially applied by the regulatory clarity.

Early signs are that a small number of businesses have already decided to cease operations as a result.

Breathing space

One complication of the bill is that the definition of ‘dealers of virtual currency’, although previously suggested to include bitcoin businesses, is not yet clear.

Non-profit Canadian trade organisation Bitcoin Alliance Canada board member Reed Holmes is one representative of the ecosystem that chose to emphasize this viewpoint, stating:

“The passing reference to virtual currencies in the bill is vague. Many questions still remain unanswered, particularly with respect to what is meant by ‘dealing in virtual currencies.’”

Crypto-experts such as Amber Scott, VP of AML with the Bitcoin Strategy Group (BSG), however, believe that there will likely be “a period of at least six months before businesses need to be compliant” with the regulation, should the laws apply to the ecosystem as expected.

For now, this means Canadian bitcoin businesses will be spared from complying with the new policies overnight, providing welcome breathing room to those who spent yesterday wondering if they are now suddenly operating outside the law.

Indeed, there are still a few more steps before these regulations are released and the bitcoin community would need to comply with new expectations. A consultation paper will need to be released, along with draft regulations.

Susan Han, counsel to BSG and securities lawyer with Toronto-based law firm Miller Thomson LLP indicated that bitcoin businesses may be able to impact the final regulation, should they be able to stay active and vocal in the coming months.

Han told CoinDesk:

“It is very important for [Bitcoin businesses and players] to comment on the draft regulation when the consultation paper comes out. If this regulation goes into effect, and [regulators] define virtual currency to include bitcoin, and virtual exchanges are put in the same regime as MSBs like Western Union or MoneyGram, it’s going to be a very expensive and awkward process.”

Bill C-31 will not come into effect until final regulations are released, which are expected to clarify exactly what dealers in digital currency need to do to comply.

Be prepared

While the final effect on the ecosystem won’t be known until this release, top players in Canada’s bitcoin community are already weighing in on the effect the law may have on their operations, should Bill C-31 apply to bitcoin businesses when implemented.

Scott noted that businesses that operate in Canada or have Canadian customers (including those served via the Internet) will likely need to register with government agencies like the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as MSBs.

This includes “maintaining an AML and CTF compliance program; remaining compliant with the laws (which includes keeping records and identifying customers, and reporting certain types of transactions); answering to the regulators; and disclosing certain information to financial service providers”.

Most large Canadian crypto-businesses, such as bitcoin exchange service providers Vault of Satoshi and CAVIRTEX say they already adhere to AML and CTF compliance programs and maintain working relationships with FINTRAC.

Mike Curry, co-founder of Toronto-based Vault of Satoshi, told CoinDesk his firm has been expecting such requirements for some time and preparing accordingly:

“We anticipated that this would happen, and worked to build positive working relationships with key players, including FINTRAC and Equifax, so we would stay ahead of the curve in this regard.”

Joseph Onorati, current process director and future compliance officer with CAVIRTEX, went so far as to suggest the there may be a silver lining in how the law will provide clarity to bitcoin businesses seeking banking relationships.

Onorati explained:

“As a registered MSB in Canada, we see Bill C-31 as a route to help Canadian bitcoin businesses gain some regulatory recognition that might carry weight with the traditional financial system. As many Canadian bitcoiners have discovered firsthand, it’s sometimes difficult to get a bank account here for a bitcoin-related business, and we hope future regulation can help those businesses to more easily form banking relationships.”

Unfortunately, Scott noted, although clearer regulation may be seen by some as positive for banking relationships, MSBs still encounter many of the same issues in securing and maintaining these relationships, despite having been regulated for several years.

Defining ‘virtual currency’

Bill C-31 does not define dealers in ‘virtual currency’. Instead, the bill states that the definition will be included in the final amended version of Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations.

Past statements from regulators, however, suggest that this final definition will target bitcoin.

A budget document released earlier this year stated:

“It is important to continually improve Canada’s regime to address emerging risks, including virtual currencies, such as bitcoin, that threaten Canada’s international leadership in the fight against money laundering and terrorist financing.”

Generally speaking, if you sell any type of good or service for profit in the cryptospace, you may expect to be included as the definition of a dealer in digital currency. Scott anticipates this definition to appear in the initial consultation paper, expected summer 2014, as well as in the draft version of the updated regulations.

Canada-based businesses dealing in digital currency today, but not engaging in any other MSB-related activities, do not fret: you are not currently considered an MSB, and you don’t have any compliance obligations (yet).

In fact, if you consider yourself to be a dealer in digital currency, you are not even able to register as an MSB at this time. However, it is advised that you start considering this process now to avoid being offside with the law in the future.

Implications for bitcoin operators

If you are working with Canadian customers and are defined as a dealer in digital currency, you will likely need to register as an MSB with Canada’s FINTRAC, should such a definition extend to bitcoin and digital currency businesses.

This process involves contacting FINTRAC to provide initial information and to gain access to its MSB registration site. Digital currency businesses will need to answer questions, including details about the owners of their business, their current banking relationships and their projected revenues. Dealers in digital currency located in Quebec will also require licensing from the Authorite des Marches Financiers (AMF).

Scott said that the federal registration process is not costly, but the Quebec licensing fees can be, depending on the size of the business.

“Licensing fees range from approximately C$607 to C$2,428, excluding additional fees of C$202 per automated teller machine (ATM) operated in Quebec,” she said. However, she cautioned that the process can take quite a bit of time, especially if regulators require clarification or additional documentation from the MSB.

All dealers in digital currency will need an updated compliance program in order to be operating legally. Compliance programs generally have five elements, including a Compliance Officer, Policies and Procedures, Risk Assessment, Training, and Effectiveness Reviews.

Even if bitcoin businesses have gone the extra mile and have voluntary programs in place, they can expect to update these programs when the final regulations are published.

Given that the five compliance elements are consistent for all regulated entities, Scott says that these are very unlikely to be different for dealers in digital currencies. Similarly, the registration requirements for MSBs are not likely to include exceptions.

Scott told CoinDesk,

“In the US, there aren’t any exceptions to federal registration as a money transmitter, but some states have proposed more streamlined and less costly state-level processes. Given that the process in Quebec is not as costly or cumbersome as some of the state-level requirements that we’ve seen South of the border, I don’t expect that there will be changes to the Quebec licensing process to accommodate dealers in digital currency.”

So far, registering as an MSB does not appear to be that much additional work for those found to be operating as dealers in digital currency.

However, dealers in digital currencies who become MSBs will also need to keep customer and transaction records for a minimum of five years, storing them in such a way that they can be easily and quickly retrieved if the regulator requires them (generally within 30 days).

Furthermore, MSBs are required to report certain transactions to FINTRAC and other agencies within set timeframes.

Remember, this does not apply to dealers in digital currency now; if you suspect yourself or your company to be one, you should start thinking now about the types of changes you will need to make to your business structures, IT systems and processes once these regulations are released.

Customer identification

Currently, MSBs are required to perform identify verification on certain types of transactions. These include:

Receiving the equivalent of C$10,000 or more in cash

Selling or cashing C$3,000 or more of travellers’ cheques, money orders etc

Sending or receiving international money transfers of C$1,000 or more

Any transaction suspected of being money laundering or financing for terrorists

These MSBs verify identity in either a face-to-face transaction or by using a combination of specific methods set out in the regulations.

Scott says that “identification in this case is tightly defined as either the MSB or its representative looking at an original, valid (not expired) piece of government-issued identification in person, or using specific methods described by the regulators. Skype and webcam [don’t] count.”

What will happen now, when we attempt to apply these standards to dealers in digital currencies, especially in the case of bitcoin ATMs?

Han noted:

“Bitcoin ATM operators are touting that they have the identification software that allows them to use face recognition technology, but so far, the regulators have not said that they will find these alternative methods of identification acceptable. There are some really interesting issues about how we are actually going to do this in an online world without using existing AML legislation.”

Potential penalties

Penalties for non-compliance can be significant, and may include either civil penalties, criminal penalties, or both.

For example, noted Scott, “failure to report suspicious transactions can result in penalties up to C$2m and/or five years imprisonment.” In addition, FINTRAC may publish penalties on its website.

“While monetary penalties can be substantial,” Scott said, “it is the publication of these penalties that can ultimately be more damaging to businesses. Few banks or other financial service providers are willing to work with organizations that have published violations for non-compliance.”

Although many digital currency businesses – even those who don’t actually buy or sell bitcoin – face hurdles securing banking partnerships, it remains to be seen if this regulation will provide relief in this regard. Many non-bitcoin MSBs struggle with banking relationships, despite being regulated in Canada for several years.

What’s next for you?

If you think you’re a dealer in digital currencies, you will have an opportunity later this year to comment on the consultation papers and draft regulations.

Scott indicated that it is unlikely that this sector will remain unregulated in Canada for long, and it’s “time to start thinking about what you’ll need to do in order to be compliant. Although there are certain things that you won’t be able to do quite yet, you can organize your resources to be ready later this year”.

Han encouraged potential MSB’s to “really watch this space, wait to see what the consultation paper looks like, and comment on it”, concluding:

“Make your voices heard in Ottawa if you want to discourage these changes from happening. If you want to encourage companies to innovate in this area, then you can’t over regulate. You must recognize that this is a different kind of beast.”

Canadian parliament image via Songquan Deng / Shutterstock.com