Sep 20, 2018
Why are so many Blockchain technology startups looking to Canada? Strategic advantages abound, including Canada’s sandbox regulatory regime and cheaper business start-up costs. This article goes over some of the distinct benefits of Canada’s blockchain industry, for those looking north to expansion.
Blockchain, the technology behind the new cryptocurrency called Bitcoin, is a peer-to-peer decentralized network allowing for increased accuracy and transparency in ledger transactions. Each party can individually access the full ledger history and verify the transaction for accountability purposes, without the need for an intermediary or central authority (such as a bank). Many say that Blockchain is the future of the financial and monetary industry.
The City of Waterloo, Ontario, has become renown in Canada for the tech start-ups locating themselves in the area. Waterlook first became known as the inaugural site of Blackberry in its prime, and now continues to be known as the Silicon Valley of the north. Furthermore, Silicon Valley in the U.S.A. has been poaching University of Waterloo engineering and computer sciences graduates; the school has a world-renowned reputation in the tech sector.
Few realize that Canada is home to Ethereum Blockchain, a second-generation platform combining blockchain technology with smart contracts. It’s founder, Vitalik Buterin, lives in Toronto, Ontario, adding to the North’s dominance in blockchain technology and adding legitimacy to the Waterloo-Toronto tech corridor. Ethereum’s company value recently surpassed $1 billion and its presence is bolstering the corridor’s venture capital tech ecosystem, making it easier for other Canadian start-ups to access funds.
The Canadian market offers a low cost to list on the Toronto Stock Exchange (TSX) in comparison to the New York Stock Exchange (NYSE), the Nasdaq Stock Market, or a regional exchange. Start-ups lacking large upfront equity that are going public should consider moving north for that reason, in addition to the lower annual fees offered by TSX.
Canadian securities exchanges are sharply adapting to Blockchain technology: In February 2018, the Canadian Securities Exchange (CSE) announced it would launch a securities clearing and settlement platform based on Ethereum Blockchain technology. Companies using this platform can issue Security Token Offerings (STO) to raise capital while in turn, they will be subject to regulation by the applicable provincial securities regulator.
As innovative and revolutionary as Blockchain may be, its regulatory framework lags far behind. The current lack of guidance from the Securities Exchange Commission (SEC) in the USA regarding cryptocurrency is stifling investment. Major players, like Barclays and JP Morgan, are rumored to be launching their own ICO’s, but the lack of certainty has halted Wall Street’s mainstream adoption of cryptocurrency, with trillions in available funds currently sidelined.
The biggest issue, in both Canada and the United States, remains whether cryptocurrencies, in particular, utility tokens, should be considered securities. This often arises in the context of a blockchain startup selling a token to raise capital for a platform that has yet to exist. Unlike the USA, which has a federal securities commission, provinces in Canada are responsible for securities regulation and control.
The Canadian Securities Administrators (CSA) is an umbrella group that harmonizes policy among Canada’s provincial and territorial regulators. The CSA has provided a guide for whether an initial coin offering (ICO) or initial token offering (ITO) would fall under provincial securities laws in the form of “CSA Staff Notice 46-307 Cryptocurrency Offerings.” Fortunately, the CSA has adopted the SEC’s posture using the Howey test to decipher whether cryptocurrency is, in fact, a security subject to its regulation, thus harmonizing North American standards (SCC Pacific Coast Coin Exchange v. Ontario Securities Commission 1970). The Howey test is a four-part test which defines what qualifies as an investment contract, thus if the ICO/ITO passes the Howey test the offering is a security subject to that jurisdictions securities regulator (SEC v. W.J. Howey Co).
Every security in the United States must be registered with the SEC or sold through an exemption. The same regime is replicated in every province and territory in Canada, where each security must be registered with the provincial authority or authorized under an exemption. In both countries, startups must be very careful in the ICO marketing and white papers to avoid referring to their token as an “investment” or a synonym (ex. gain, promise) as this would likely trigger a positive outcome running the Howey test. However, the SEC to date has come down much harder than Canadian regulatory authorities on non-compliant ICO’s, often killing them in their tracks.
Canada has taken a divergent approach from the USA with the CSA launching the Regulatory Sandbox Initiative in February 2017. This initiative allows for enhanced communication between regulators and startups to ensure provincial securities compliance. Ventures apply to have their products tested in the Canadian market while the CSA safeguards investors, an initiative which makes moving to Canada advantageous when compared to the stringent SEC regime. With regard to the Waterloo-Toronto tech corridor, the Ontario Securities Commission (OSC) has stated that cryptocurrency and blockchain developments will be a key area of focus this upcoming year, with regulatory improvements likely to follow.
Some startups have taken the stance that the uncertain US regulatory framework allows for creative opportunities to classify as a utility token. However, take the cautionary tale of failed startup Munchee; Munchee was a highly anticipated blockchain token attempting to launch their own currency for restaurant reviews which they classified as a utility token rather than a security. In December 2017, Munchee raised $15 million from 40 investors the first day of their ICO and had to return it all the very next day when they received a cease and desist letter from the SEC disagreeing with their classification.
Blockchain startups should seek legal counsel to ensure they have a proactive, rather than reactive, legal strategy. They need to worry about whether their proposal can be classified as a security rather than a utility token. The Blockchain lawyers at CKR Law LLP highly recommend that an attorney review your ITO’s/ICO’s white paper to assess how likely it is that the proposal will be considered a security. Unfortunately, once the SEC has your startup on their radar for a violation, it’s often too late.
The SEC regulations and CSA policies have potentially far-reaching consequences with regard to jurisdiction. Even for startups that are not owned by Americans, if part of the business is located in the United States, or employees must visit often, they can easily become entangled by these regulations. With regard to Canadian regulations, the aforementioned CSA notice suggests that Canadian securities law applies if the ITO/ICO involves Canadian investors or if business is conducted in Canada. If in doubt, speak to a trusted advisor about your jurisdictional concerns.
Explore the Startup Visa: Canada launched a new immigration path for start-ups, providing a possible permanent resident visa for those with new businesses being set up in Canada. This program provides a much-needed immigration avenue for blockchain startups interested in moving north and sending their personnel to live in Canada permanently. Conditions regarding minimum investments and share value apply; speak to a trusted corporate advisor to learn whether you are eligible.
Open up in British Colombia: This province (BC) does not require residency for their corporate directors; thus a branch of an existing company abroad may only need to register to conduct business in a particular province without having to incorporate. Additionally, BC is leading the nation in startup and entrepreneurial activity, with the Business Development Bank of Canada (BDC) referring to BC as a ‘hot spot’ for start-ups. With all the recent business activity, this may be an ideal location for permanent residency for Startup Visa & provincial Investment Visa candidates.
Quebec: Cryptocurrency mining has become increasingly popular in the Province of Quebec since the cryptocurrency Bull Run at the end of 2017. Successful cryptocurrency mining is a function of competition (how many other miners are attempting to solve the algorithm at the same time) and electricity prices. The latter depends on electricity prices in the province as well as the temperature year round. Quebec is emerging as a cryptocurrency mining ‘goldmine’, attracting Chinese investors who are wise to take advantage of the fact that Quebec has about 1/3rd of the electricity prices of Ontario, affordable high-speed internet and has cold temperatures throughout most of the year.
Ontario: Take advantage of the ‘Waterloo-Toronto corridor’ or ‘Waterloo-Toronto-Ottawa tech triangle’ by settling in the region. Start with a student-visa and take advantage of the tech-oriented universities and blockchain employment opportunities thriving in the region. Consider temporary and then, later on, more permanent residency options with a trusted immigration advisor.
Consider BlockPresent: Your mobility advisor can help you prepare a Business Plan using Blockchain tech to be presented to VCs and Angel Investors in Canada. Given the popularity and welcome of Crypto business in Canada, the project might get picked up and funded, opening the door to permanent residence in Canada.
N.B. On August 22, 2019, the SEC rejected 9 Bitcoin ETF applications from three different applications, including the long-anticipated Direxion proposal (delayed from this winter). The SEC cited concerns that the ETFs were not safe from fraud or price manipulation. One day later, the SEC announced they would review the decision of their staff. CKR Law is closely monitoring the situation and its influence on market prices for cryptocurrencies.