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The world of finance is rapidly changing. Fintech, cryptocurrency, and blockchain technology is changing the way companies do business across all sectors and industries. As a result, these areas of digital finance are facing increased regulatory oversight in Canada and worldwide.

On April 29, 2022, Alberta’s Financial Innovation Act received Royal Assent and will come into effect on a date set by proclamation. This Act creates a “regulatory sandbox” that will be a significant step forward for the Canadian cryptocurrency and financial technology (fintech) sector.

Crypto becoming increasingly regulated in Canada

Earlier this year, we wrote about the increased regulation placed by the Ontario Securities Commission on Ontario businesses offering crypto trading services. We have also reviewed the recent guidance issued by Canadian regulators regarding acceptable marketing practices for businesses that operate crypto trading platforms. Additionally, crypto businesses falling under the Money Services Businesses regulatory category in Canada are governed by strict registration requirements

Regulatory sandboxes are another form of oversight that is being considered at both the federal and provincial levels in Canada. We have written about Bill C-249, which is intended to enable the creation of a national regulatory framework for the crypto asset framework. In March 2022, Alberta proposed its own regulatory sandbox through the creation of Bill 13, the Financial Innovation Act

What is a “regulatory sandbox”?

A regulatory sandbox allows companies to experiment with new products or services. Companies participating in the sandbox are afforded some flexibility and relief from regulatory requirements that may not be strictly applicable to innovative products or services and that may create unnecessary burdens and stifle creativity. 

While these companies face some relaxed regulation, sandbox initiatives always require participating companies to meet regulatory terms and conditions aimed at protecting potential investors or consumers. 

Alberta passes provincial crypto regulatory sandbox

Bill 13 received Royal Assent in Alberta on April 29, 2022. The Bill, now referred to simply as the Financial Innovation Act, establishes the first provincial regulatory sandbox for the finance and fintech sectors. The provisions of the Act provides these sectors with new opportunities to develop their businesses and create jobs at a time when the pandemic has created seismic shifts in the way people work. 

In its announcement about Bill 13, Alberta stated that the province believes that the proposed regulatory sandbox would “signal that Alberta is willing to work with and support innovators with cutting-edge products” and would open the door for Canadians to be able to access a wider variety of product and services. 

Koleya Karringten, the Executive Director of the Canadian Blockchain Consortium, previous stated that the Regulatory Sandbox is a “game-changer” for Canada’s blockchain industry and that the sandbox will “streamline the legislative and regulatory process, making it more viable for companies to bring their ideas and businesses to life”. 

Acceptance criteria – Ontario companies may participate

While the full list of restrictions will be set by regulation, Bill 13 as drafted imposes a list of minimum criteria that companies would need to meet in order to participate in the sandbox. These include:

  • Physical presence requirement: Applicant companies would need to maintain an Alberta office or ensure that they have senior staff living in Alberta. This opens up opportunities for Ontario companies with remote workers in Alberta. 
  • Financial services requirement: As the Financial Innvocation Act is aimed at fintech innovation, companies would need to offer financial products or services.
  • Innovation requirement: Companies would need to justify the innovative aspects of their proposed products or services and demonstrate material innovation as compared to products and services already being offered in Alberta. The sandbox is not intended for existing offerings already available to consumers in Alberta.
  • Business plan requirement: Companies applying for the sandbox must have a clear path forward, including a demonstrated understanding of how the company plans to test its products and services and how the company intends to eventually achieve compliance with regulatory requirements. 
  • Consumer protection requirement: Companies would need to be able to prove that their fintech product or service is a net benefit to the public and that it is able to operate in a “safe and sound manner” with “reasonable consumer protection arrangements”. 

Oversight, offences, and penalties

While part of the sandbox, companies will be expected to provide annual corporate information returns to the government, which will provide key corporate information, such as financial statements and director information. 

In addition to annual returns, the government will also have the power to inspect and examine entities for operational matters, including:

  • Sound business and financial practices
  • Management procedures and standards
  • Compliance with terms, conditions or restrictions that were imposed on the company as part of its acceptance into the sandbox

If a company fails to comply with any of the sandbox requirements and, in so doing, contravenes any provision of the Financial Innovation Act or its regulations, it can face steep penalties. The monetary fines increase after a first offence and can add up quickly if imposed per violation. A company’s first conviction can result in a $100,000 for the first conviction, while each subsequent conviction can carry a $200,000 fine.

Alberta regulatory sandbox offers opportunity for adoption by Ontario

The Alberta government has indicated that it will begin accepting applications under the Financial Innovation Act on July 4, 2022. 

While the sandbox is an Alberta initiative, it is clear that Ontario companies can also participate. Fintech, unlike many other industries, is exceptionally well suited for remote or virtual work environments, and many Ontario innovators could benefit from pursuing an application. 

Further, Alberta’s sandbox could be the model for the regulatory sandbox recommended to Ontario’s premier Doug Ford by the Capital Markets Modernisation Taskforce in its 2020 Consultation Report

Contact Bader Law For Experienced Advice on Crypto Business Matters

Bader Law understands the complexities of the cryptocurrency and fintech sectors and provides reliable business law advice to companies looking to expand into these new areas. Our business lawyers provide dynamic solutions for crypto and tech companies in Mississauga and throughout the Greater Toronto Area. To schedule a consultation with a member of our team, contact us online or call 289-652-9092.