How Future Regulation Will Shape Canada’s Blockchain Environment

With the rapidly increasing use of cryptocurrencies, astronomically-growing market capitalization, and widespread awareness of the strengths of the blockchain, regulators around the world have been scrambling to take control of these technologies, or even establish an official opinion on them.

Some countries have taken an extreme stance of intolerance; for instance, China has banned the use of cryptocurrencies entirely. By comparison, other jurisdictions like Singapore not only permit the use of these currencies, but they also provide favorable laws under which such parties as blockchain developers and cryptocurrency exchanges can safely do business.

From a regulatory perspective, Canada’s position on this matter falls somewhere in the middle. Canadian securities regulators have taken a conservative approach to blockchain technology, which many believe stands to impede progress, possibly to the market’s frustration. This is not a favorable risk to be taking, as the stakes are currently very high for Canada’s lawmakers to act quickly and proactively in the midst of cryptocurrencies becoming mainstream.

Having a critical mass of technology startups, qualified technical talent, and a booming interest in cryptocurrencies, the Canadian market has ample opportunity to become a world leader in the blockchain sphere. However, when key developments cannot occur for regulatory reasons, opportunities can either be halted or pursued in foreign jurisdictions. Both of these outcomes are deterrents to Canadian companies seeking to use the blockchain, as well as to foreign companies who seek to do business in Canada.

Regulators are therefore put in a challenging and somewhat precarious position. With the best interests and the trust of the public in mind, regulations must be strict enough to hold businesses and investment companies to the highest standards within existing legal frameworks. Also with the long-term interests of the Canadian economy in mind, threats to the ability of Canadian residents and companies to participate in the blockchain ecosystem must be mitigated so that potentially lucrative blockchain-related opportunities do not needlessly migrate to other jurisdictions. Striking an appropriate balance between these two needs will prove to be a pivotal achievement for Canada to stake its claim as a major hub for the world’s blockchain-centered trade and not lose market share by failing to adapt quickly enough.

Currently, Canada has a healthy population of blockchain startups. It is third only to the United States and the United Kingdom, with respect to the number of such companies. Despite this impressive ranking, regulatory conditions have prevented the Canadian blockchain industry from being at its best by discouraging otherwise willing participants in deals that had to happen elsewhere. One example is how Ethereum, despite having much of its development take place in Canada, decided to base its governing body out of Switzerland, which like Singapore is much more friendly to cryptocurrencies and blockchain technologies. Another example is the Canada-based messaging app Kik, which conducted an ICO in September that excluded Canadians altogether due to regulatory uncertainties.

To address this issue, Canadian securities regulators are taking adaptive steps to welcome the use of cryptocurrencies and the blockchain, by clearly defining regulations that apply to the use of these technologies, and where exemptive relief can be sought as necessary. At the center of these efforts is the Regulatory Sandbox initiative, put into motion by the CSA (Canadian Securities Administrators), the informal body that seeks to harmonize securities regulations between the regulatory bodies of each province and territory.

The Regulatory Sandbox acts as somewhat of an “express” model for fintech companies to have their business models assessed and altered for compliance as appropriate, to allow their product, service, or application to be tested in the Canadian market. It provides a five-step process, in which applicants go through their local securities regulator to determine the types of registrations or exemptions that will be needed in order for them to legally operate. The CSA will then review filed applications, tailoring limits and conditions for applicants to do business for a fixed period of time on somewhat of a trial basis, bypassing the lengthy and cumbersome application processes that businesses would normally face before entering a financial market. This is complemented by fintech-oriented initiatives from provincial securities regulators, such as the LaunchPad program under the Ontario Securities Commission, which provides a similar streamlining process for compliance.

In summary, Canada’s regulatory environment for blockchain is favorable but still needs improvement. The effects of stifling growth in the blockchain sector extend beyond just regulatory issues and conflicts. If capital and talent escape the Canadian marketplace in pursuit of blockchain-related ventures elsewhere, the opportunity costs will swell in ways that include foregone tax revenue and a loss of potential local jobs. Canada may be classified as a leading place to do business with blockchain technology, but that is measured by the standards of yesterday, not today.

What will enable Canada to maintain or surpass its current position in the world’s ranking of blockchain marketplaces is an improved regulatory understanding of the blockchain in terms of what it is, why it’s necessary, and why it benefits everyone involved in the context of investing. Achieving this is a two-way street, requiring both receptiveness on the part of regulators and openness on the part of businesses that use blockchain technologies. By working together to cultivate an informed, efficient, non-secretive atmosphere, businesses and regulators stand to enjoy the benefits of a unified effort to put everyone on the same page.

Contrary to the way it may appear on the surface, the objectives of the businesses and regulators are not at odds with each other. While regulatory conditions in Canada for blockchain are presently advantageous, collaboration between all stakeholders will maximize value for sustainable, world-class growth in the ever-dynamic blockchain arena.

Shidan Gouran is the President and COO of Global Blockchain Technologies.