Canadian securities regulators are taking a closer look at technology companies that offer digital currencies such as bitcoin to raise funds, to make sure they abide by the right set of rules.
Similar to an initial public offering, or IPO, of a stock, a flurry of Canadian technology companies have recently raised money via ICO — initial coin offerings — in which digital tokens or coins are given to early investors in exchange for money, which the tech companies use to create their product.
'We are open to innovation but we need to ensure that investor protection will be there.' - Louis Morisset, Canadian Securities Administrators
"The coins/tokens can be similar to traditional shares of a company because their value may increase or decrease depending on how successfully the business executes its business plan using the capital raised," the Canadian Securities Administrators said in a news release last week.
Companies raising money via an IPO process have to adhere to all sorts of rules surrounding disclosure, and making sure investors have enough information to make an informed decision and weigh the risks. That isn't always the case with ICOs because they are sometimes treated as a currency.
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But while the digital coins being exchanged are often established cryptocurrencies like bitcoin or ethereum, sometimes they are something else entirely, which is why regulators are looking to clarify the rules to determine whether such fundraising deals should be treated similarly to equity investments, or more like conventional money — on a case-by-case basis.
The CSA published a paper last week attempting to outline which securities laws need to be applied, depending on the nature of the investment.
"We are open to innovation but we need to ensure that investor protection will be there," the regulator's chair, Louis Morisset, said in an interview with CBC News Network's On The Money.
Regulators in the U.S. are going through a similar process. The Securities and Exchange Commission recently ruled that a major cryptocurrency offering known as the Decentralized Autonomous Organization, or DAO, which raised $150 million US last year, was in fact a securities offering, and as such breached the rules it should have been bound to.
There's hundreds of millions of dollars at stake. The largest ICO thus far recently raised more than $200 million US for a new blockchain called Tezos.
While broadly receptive to more clarity on the rules, many in the cryptocurrency world are wary of an over-reach by regulators that would see them treat all such fundraising plans as securities offerings when, in fact, they should be treated the same way other private currencies are.
"A network access token is a lot more like a private currency," said Chris Horlacher, CEO of software company Equibit Group, in a recent On The Money interview.
Instead of being treated like stocks, the mast majority of such ICOs are more akin to things like Canadian Tire dollars or Air Miles points, Horlacher said. "They have been around for decades," he said, "and none of these have ever been deemed a security."
While Horlacher concedes that some ICOs — most notably the DAO — are, in fact, little more than marketing investment funds that should be treated like equity investments, he says it's unfair to paint all ICOs with the same brush.
"There's a lot of concern that regulators are going to consider them all as securities," he said. "That would be very bad for the industry."
The CSA paper falls well short of a crackdown on ICOs overall. The agency just wants to make sure that any Canadian financial firms coming to market with ICOs in the future know and abide by the rules.
"There's no guarantees on these investments, but at least investors will have the full package of information that will allow them to make an informed decision," Morisset said.