Canada has been at the forefront of recognizing the potential of cryptocurrency since it began incorporating it into law in 2014. Over the past decade, crypto adoption has expanded steadily, with both the public and private sectors showing increased engagement.
Canada's approach to cryptocurrency reflects a balance between innovation and regulation. Recent developments indicate a growing acceptance of cryptocurrency.
Government Adoption
The government's support for cryptocurrency points to wider acceptance and integration. The Canadian government has implemented clear rules, regulations, and disclosure requirements for entities involved in cryptocurrencies. This clarity has fostered a thriving ecosystem of crypto businesses in Canada.
In 2018, the Ontario Securities Commission approved Canada’s first blockchain exchange-traded fund (ETF). It is now trading on the Toronto Stock Exchange, with additional ETFs awaiting approval.
The Canadian Department of Finance proposed in 2019 to simplify federal sales tax for transactions involving virtual payment instruments (VPI). This would exempt many cryptocurrency transactions from federal sales tax.
The Canadian Securities Administrators (CSA) also played a key role in the adoption of crypto by offering the CSA Regulatory Sandbox.
The objective of this initiative is to facilitate the ability of those businesses to use innovative products, services and applications all across Canada, while ensuring appropriate investor protection,” said Louis Morisset, CSA Chair and President
This initiative invites cryptocurrency businesses to register. Thereby providing them with a structured environment to innovate while ensuring compliance with regulatory standards.
Individual Adoption
Today, over four million Canadians own crypto assets, representing a significant percentage of the country's population.
With each passing year, more people are embracing digital currencies. Statista projects that the cryptocurrency user penetration rate in Canada will reach 34.01% in 2024. This rate is also projected to increase to approximately 13.36m users by 2025.
A survey conducted by the Ontario Securities Commission (OSC) in October 2022 highlighted this growing trend.
“13% of Canadians currently own crypto assets or crypto funds: 6% own crypto assets only, 6% own both crypto assets and crypto funds, and 2% own crypto funds only. 8% used to own either crypto funds or crypto assets”
In addition, the survey record that 31% of Canadians indicated their intention to purchase crypto assets within the following year.
This surge in adoption is seen across diverse segments of the market, cutting across different age groups, income levels, and professional backgrounds. Both individuals and institutional investors are increasingly active in the space, signaling a broader acceptance of these assets.
Bitcoin (BTC) and Ethereum (ETH) remain the most popular choices among Canadian investors. These two digital assets have seen greater popularity in Canada compared to many other markets.
Institution Adoption
A KPMG and Canadian Association of Alternative Assets and Strategies (CAASA) survey shows a notable rise in the adoption of crypto assets among Canadian financial services organizations and institutional investors.
The survey found that 22% more financial services organizations offered crypto asset products in the past year compared to 2021. Half of the respondents indicated their organizations actively provided at least one crypto asset product or service, up from 41%.
Institutional interest has also grown, with 26% more investors incorporating crypto assets into their portfolios last year. Nearly 39% of institutional investors reported direct or indirect exposure to crypto assets, an increase from 31% in 2021.
According to co-leader of KPMG’s Digital Assets practice, Mr Kareem Sadek, "Traditional financial institutions are increasingly recognizing the need to provide crypto asset services to meet customer demand.”
Crypto Laws in Canada
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Source: Freepik
Digital assets, including cryptocurrencies, are treated as securities in Canada. This means they fall under the jurisdiction of various security laws governed by provincial and territorial regulators.
Canada's regulatory approach is not centralized. Instead, it operates through regional laws established by securities regulators in each province and territory. These regulators are part of the Canadian Securities Administrators (CSA), a national organization that coordinates and harmonizes securities regulation across the country.
Despite the regional nature of these laws, they share a high degree of consistency across provinces and territories. The laws apply to entities involved in the distribution or use of securities within these specific regions.
In 2014, Canada became the first country to address cryptocurrency through legislation. The government amended the Proceeds of Crime and Terrorist Financing Act (PCA) to include individuals and entities dealing in cryptocurrencies. This marked a significant step in regulating digital assets. It also highlighted the government’s cautious approach toward this technology.
Anti-Money Laundering Law
Canada was the first country to regulate cryptocurrency under anti-money laundering (AML) laws with the passing of Bill C-31 in 2014. This legislation expanded the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to include cryptocurrency exchanges, treating them as money services businesses (MSBs).
This regulation requires those involved in cryptocurrency transactions to follow the same AML procedures as traditional financial institutions. This includes Know Your Customer (KYC) protocols, maintaining transaction records, verifying customer identities, and reporting suspicious transactions. However, amendments from Bill C-31 have not been fully implemented since July 2018.
MSBs must report large cash transactions of CAD 10,000 or more to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). If multiple smaller transactions from the same person or entity total CAD 10,000 or more within 24 hours, they also require reporting. This ensures greater oversight and control over potential money laundering activities.
The Virtual Currency Travel Rule
The Virtual Currency Travel Rule was implemented in February 2020. It requires money service businesses and financial institutions to document cross-border cryptocurrency transactions, as well as electronic fund transfers.
In Canada, this rule became applicable to virtual currencies through an amendment to the PCMLTFA and is overseen by FINTRAC's guidance. It has been effective since June 1, 2021. The rule mandates record-keeping for transactions of CAD 1,000 or more, obligating Virtual Asset Service Providers (VASPs) to maintain detailed information about these transactions.
For transactions of CAD 10,000 or more, VASPs must retain specific data, including the names, addresses, dates of birth, and occupations of individuals involved. They must also submit a Large Virtual Currency Transaction Report (LVCTR) to FINTRAC, following compliance guidelines to prevent illegal financial activities.
Taxation of Cryptocurrencies in Canada
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Canada’s tax laws treat cryptocurrency as a commodity rather than a government-issued currency. The Canada Revenue Agency (CRA) and the Financial Consumer Agency of Canada provide guidelines on how digital currencies are taxed when used in transactions, traded, or mined.
Payments in Cryptocurrencies
The Canada Revenue Agency says "Since cryptocurrency is not government-issued currency, using cryptocurrency as payment for goods or services is treated as a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using government-issued currency."
This means when digital currencies are used to pay for goods or services, the transaction must be reported for tax purposes.
The seller must include the value of the goods or services purchased with cryptocurrency in their income. Also, the value of the transaction is calculated in Canadian dollars.
Trading Cryptocurrencies
Any gains or losses from buying or selling digital currencies must be reported when filing taxes. Gains or losses may be considered either taxable income or capital, depending on the nature of the transaction.
If the cryptocurrency is held for long-term growth, gains or losses are usually treated as capital. If trading is conducted as a business, gains or losses are treated as income. The cost basis for trading is equal to the value of the cryptocurrency exchanged.
There may be an obligation to collect GST/HST or QST on cryptocurrency trades, though the CRA has not provided definitive guidance on this.
Mining Cryptocurrencies
Cryptocurrency mining can be either a taxable business activity or a non-taxable personal hobby. If mining is conducted as a business, the income must be included in the taxpayer’s income.
Income from mining is determined by the value of inventory at the end of the year. Mining as a personal hobby is not subject to taxation.
Crypto Regulations in Canada
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Source: Freepik
Canada's crypto regulations approach focuses on ensuring compliance, transparency, and accountability for all operating in the crypto space.
Cryptocurrency Dealers and Compliance
In Canada, all cryptocurrency dealers fall under the category of Money Services Businesses (MSBs). This designation imposes strict requirements on these businesses, including:
- Due Diligence: Dealers must verify the identities of their customers and assess the risks associated with their activities.
- Record Keeping: Maintaining detailed records of transactions and customer information is mandatory to ensure traceability.
- Monitoring and Reporting: Dealers must closely monitor activities for suspicious transactions and report these when necessary.
Virtual Asset Service Providers (VASPs) in Canada must also register with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC). Part of this registration includes implementing Know Your Customer (KYC) procedures to verify customer identities and prevent illicit activities. Any cryptocurrency transfer over CAD 10,000 must be reported to FinTRAC to enhance oversight and combat money laundering.
Crypto-Asset Trading Platforms (CTPs)
Crypto trading platforms in Canada are regulated by two main groups: FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) and the Canadian Securities Administrators (CSA), along with the Ontario Securities Commission (OSC).
Canada differentiates between crypto-asset trading platforms (CTPs) based on their handling of customer assets:
- Immediate Delivery Platforms: Platforms that deliver crypto assets directly to clients upon purchase are not subjected to the same stringent regulations as those holding customer assets.
- Custodial Platforms: If a platform holds, possesses, or controls customers' assets, those assets are treated as securities or derivatives. As a result, these platforms are regulated as security dealers, adhering to the rules that apply to traditional financial institutions.
This distinction ensures that platforms with higher control over customer assets meet stringent regulatory standards to protect users from risks associated with asset custody.
Guidance for Reporting Issuers
The Canadian Securities Administrators (CSA) provide guidance for reporting issuers significantly involved with crypto assets. This guidance aims to ensure that these entities offer clear and accurate disclosures to their investors. The CSA's goal is to help issuers avoid misleading statements and supply the necessary information for investors to make well-informed decisions.
Key Use Cases of Cryptocurrency in Canada
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Source: Freepik
Crypto in Canada has various practical uses across different sectors. Here are some key areas:
Payment Systems
Cryptocurrencies are finding their way into everyday transactions. Several Canadian retailers, restaurants, and online businesses now accept crypto as a form of payment. Payment processors enable consumers to pay with Bitcoin, Ethereum, and other digital currencies.
Investment Opportunities
Cryptocurrencies have become an essential part of their investment portfolios for many Canadians. Digital assets like Bitcoin and Ethereum are seen as a hedge against inflation and an opportunity for growth. Investors are exposed to a new asset class without directly buying coins with crypto-focused ETFs.
Remittances Made Easy
Sending money internationally can be costly and slow with traditional banking methods. Cryptocurrencies offer a faster, more affordable alternative. Canadians use crypto to send funds abroad. Thereby avoiding high fees and long wait times associated with bank and money transfer services.
Fundraising and Crowdfunding
Charities and non-profits in Canada have started to accept crypto donations as an additional revenue stream. For startups and projects, Initial Coin Offerings (ICOs) or Security Token Offerings (STOs) are becoming popular fundraising methods. This allows them to raise capital while bypassing traditional venture capital channels.
Challenges of Crypto Adoption in Canada
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Crypto adoption in Canada encounters obstacles that limit broader acceptance despite its popularity. They include;
Security Risks
Concerns around hacking and fraud continue to threaten user confidence in digital currencies. Security issues like hacking, fraud, and scams deter potential users. The irreversible nature of cryptocurrency transactions causes many to hesitate in adopting digital currencies.
Environmental Impact
The environmental impact of cryptocurrency mining, especially Bitcoin, has sparked debate. Canada’s focus on sustainability makes this a concern for policymakers and environmentally conscious citizens.
Complexity of Use
Cryptocurrencies require a level of technical understanding that many people don't possess. Managing wallets, private keys, and transactions can seem daunting for non-technical users.
Banking Restrictions
Some Canadian banks have been cautious about dealing with cryptocurrency transactions. They impose limitations on transferring funds to and from crypto exchanges, creating hurdles for users.
Taxation and Reporting Issues
Tax laws regarding cryptocurrency in Canada are complex. Reporting requirements and uncertainty about how to handle crypto gains or losses deter users from fully engaging in the market.
Benefits of the Adoption of Crypto in Canada
Alt Text: Crypto coin on US dollar bills
Source: Freepik
Cryptocurrencies have the potential to transform Canada's financial landscape. Here are some of the benefits of the adoption of crypto
Lower Transaction Costs
Crypto transactions often come with lower fees compared to bank transfers or credit card payments. This makes it a cost-effective option for Canadians to make cross-border transactions and remittances.
Diversification of Investment
Cryptocurrencies offer an alternative asset class for investors in Canada looking to diversify their portfolios. They provide opportunities for growth outside traditional stock markets or real estate.
Decentralization
Cryptocurrencies operate without central authority control. This would give Canadian citizens more control over their money. It can also reduce their dependence on traditional financial institutions.
Faster Payments
Transactions using cryptocurrencies can be processed in minutes, regardless of geographical location. This speed benefits businesses and individuals in Canada, especially when sending money internationally.
The Potential For Crypto in Canada
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The role of cryptocurrencies in daily life and business transactions is set to expand even further. Here are some key areas to look out for;
Supportive Regulatory Environment
Canadian regulators have shown a willingness to engage with crypto firms to develop clear guidelines. Continued regulatory progress could boost investor confidence and attract crypto-related businesses.
Increased Institutional Adoption
Canadian financial institutions have started to explore blockchain technology and cryptocurrencies. If this trend continues, it could lead to greater mainstream acceptance and integration of digital assets.
Canada’s Digital Currency
The Bank of Canada is researching the feasibility of launching a digital version of the Canadian dollar. This initiative could reshape payment systems by offering faster transactions and more accessible financial services across the country.
Sustainable Mining
New initiatives may focus on reducing the carbon footprint of crypto mining activities in the country. Efforts include transitioning to renewable energy sources and improving energy efficiency in mining operations. These changes aim to align crypto mining practices with Canada’s broader environmental goals.
Increased Consumer Interest
Public awareness and interest in crypto continue to grow in Canada. If this momentum is harnessed effectively, it could lead to widespread adoption and acceptance of digital currencies in everyday use.
Conclusion
Crypto adoption in Canada is steadily progressing. Supportive regulations, public interest, and institutional engagement drive this progress. Since 2014, the country has built a regulatory framework that promotes a secure environment for digital assets. Millions of Canadians now invest in crypto. Institutional interest is also rising due to the demand for diversified financial products.
Challenges like security risks, environmental impact, and complex tax laws persist. But efforts in sustainable mining and a potential Central Bank Digital Currency (CBDC) show Canada’s focus on advancing the crypto landscape.
With clear rules and growing adoption, Canada is set to lead in integrating cryptocurrencies into daily finance.
