Suppose you operate a Money Service Business (MSB) in Canada without realizing it. You could wind up in hot water if you fail to register with the Financial Transactions and Reports Analysis Centre (FINTRAC) and comply with The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”).
If you have a Canadian place of business, safeguard client assets, and perform one or more of the following functions, be sure you’re in full compliance:
- Foreign exchange dealing
- Remitting or transmitting funds
- Issuing or redeeming money orders, traveler’s checks, or anything similar
- Dealing with cryptocurrency exchange or transfer services
- Crowdfunding platform services
The Growth of Canadian MSBs
Several types of MSBs are growing exponentially in Canada.
For instance, Canada’s number of new immigrants has doubled yearly since 2000, and the growth of its foreign currency exchange and remittance markets are directly correlated. Its foreign currency exchange services industry is expected to increase by 29.2% in 2022, while its digital remittance transaction value is expected to grow at a 5.71% CAGR between 2022-2027 and exceed $2.33 billion.
Additionally, Canada’s digital payments are projected to grow at a 15.20% CAGR between 2022-2027 and reach a market volume of $243.1 billion.
The Role of Crypto as an MSB
One aspect of MSBs gaining significant traction globally and within Canada, is crypto.
Canada began regulating cryptocurrency activity in August 2017 after the CSA passed the CSA Staff Notice 46-307 Cryptocurrency Offerings Act.
Canada further cracked down in March 2021 and is again looking to reign in the industry following crypto’s multiple collapses and inefficiencies in 2022, most notably the unwinding FTX bankruptcy.
“This is an area that is still small, but it’s growing really rapidly. And it is largely unregulated,” Bank of Canada Senior Deputy Governor Carolyn Rogers told Reuters. “We don’t want to wait until it gets a lot larger before we bring regulatory controls in place.”
If you are a crypto entrepreneur or business owner attempting to handle or safeguard client assets, you must register with FINTRAC.
Furthermore, securities legislation must also apply to cryptocurrency transactions. Some cryptocurrencies can be considered a security under securities law depending on how they are structured, marketed and designed.
Additionally, crypto is not considered legal tender in Canada. Transactions with crypto are allowed, but you cannot use it to pay state fees, taxes and charges. Crypto is also defined as a commodity (e.g., tokens are considered “utility” or non security tokens), which acts as a barter transaction in exchange for other goods.
Operating in a country without regulations may seem more appealing to an entrepreneur. After all, the world’s largest and most liquid crypto exchange, Binance, recently left Ontario because of the OSC (Ontario Securities Commission) regulatory regime.
However, history tends to repeat itself in business. Outcomes rarely end favorably without a sound and credible regulatory framework cultivating strong controls and accountability.
Conclusion: Do I Need to Get Registered?
Crypto custodians, fintech companies, and payment processors like PayPal are conduits in the payment cycle and hold or safeguard client assets- even for a short period.
All else being equal, if a financial conduit does not safekeep client assets or money, the business is not required to be registered with FINTRAC as an MSB. However, this does not imply that KYC (Know-Your-Customer) rules can be ignored, but simply that formal registration is not needed.
The financial conduit has regulatory compliance obligations for which other third parties (e.g., custodians, payment processors that hold client assets for any given period) that it deals with is relying upon to ensure their risk exposures are mitigated.
If you think your firm is safekeeping client assets and fall into one of Canada’s categories as an MSB, speak to us at Black Swan Diagnostics. We can guide you in the right direction.
Failing to register with FINTRAC if your business model triggers the MSB requirements violates the PCMLTFA regime and can result in fines of up to $2,000,000 and/or up to five years of imprisonment.
Reputations take years to develop but seconds to destroy.
Black Swan can help you navigate the regulatory compliance requirements, first and foremost, with compliance manuals. As an MSB, you will need all compliance manuals specific to your business model.
Additionally, MSBs also need an Independent Risk Assessment to identify and evaluate their key risk exposures and how to best mitigate them.
Lastly, the registration process includes other specific tasks like setting up a legitimate Canadian bank account and completing several KYC forms, risk acknowledgment disclaimers, terms of use, privacy policy, policies and procedures.
Our experience at Black Swan comes with a unique understanding that different responsibilities and obligations come once you’re a regulated entity. We can help guide you every step of the way and help you complete the registration process with all Manuals within three months.
We welcome the opportunity to speak with you and answer any inquiries.