Do your eyes glaze over when you hear the word “cryptocurrency”? Had a friend explain it to you or read an article and it left you more confused and you cared even less?
Bitcoin is the most heard of cryptocurrency, but there are many many more. It is the Aston Martin of cars, but there are still Lexus, Toyota, and Ford.
Before you tell me that cryptocurrency has zero impact on your life, I bet money affects your life.
While you get paid now in Canadian dollars for a job well done, imagine a future when you get paid in cryptocurrency.
Imagine buying meals in Toronto, paying for a flight and even spending money abroad with your hard earned cryptocurrency.
What is so “crypto” about this “currency”?
A cryptocurrency is a virtual coin only available in digital form. There are no physical forms, so don’t expect a printed bill or silver coins!
Taking bitcoin for example:
There are no financial institutions, no central authority and no government acting as a watchdog.
I repeat – no government, no banks.
The transactions are instantaneous. It is instant because there is no bank that needs to process the transfer.
The transfer-of-ownership is border-less. This means that you could transfer ownership from Canada to Japan (or anywhere in the world for that matter) and there would be no need to exchange currencies.
So then, what the heck is a Blockchain?
Blockchain is the underlying technology for cryptocurrency. It is simply a cool software invention that is open-source and free. Bitcoin is just one way to use this tech.
Blockchain is a ‘distributed ledger technology’
It is a database. Not very exciting.
The exciting part (drum roll please) is that this is a peer-to-peer network and once recorded, it can’t be altered retroactively without further blocks being altered, which would require consensus of the network majority.
It’s like if everyone in the world wrote one word of one book. Everyone stored this book on their own network. Further changes made to the book are automatically updated to their own network.
The kicker is that you can’t change what has already been written – unless the majority agreed. And since it’s replicated and stored on millions of networks, it’s kind of hard to get the majority to agree. It’s almost like it is written in stone.
The other exciting part? There is no central server.
Imagine a future where information is unregulated yet still credible.
Now the law…
No one knows how to classify “cryptocurrency.” What is it? Should it be regulated? By who and how?
There is no “cryptocurrency” law (yet). But there are laws about “securities.”
Now. I wish I could just give you an easy one-liner definition of “security.”
I can’t do that.
Securities are regulated by the Securities Act (the “Act”) and the Act gives a very wide definition to what is considered to be a “security” – 16 different definitions!
Don’t worry – we are not going through the Act.
All you need to know is that there is a catch-all concept called “investment contract.” (s.1(n)).
The test asks: is there an investment of money, in a common enterprise, with an expectation of profit, solely from the efforts of others?
Are you investing money to make money thanks to someone else?
Now, you’re thinking: well I’m just buying some bitcoin, transferring it out, it’s not an “investment.”
That’s where the plot thickens and you have to learn a new concept. Ready?
Initial Coin Offering…
Introducing the Initial Coin Offering, also called Initial Token Offering. Sounds like the familiar Initial Public Offering that happens when a stock goes public?
They are both similar in the fact that they both raise money for new ventures.
An Initial Public Offering issues securities (being shares) in the company in return for an investment (being money).
An Initial Coin Offering just gives you cryptocurrency. You don’t get any ownership in the company by getting stocks and you are not a shareholder.
The Canadian Securities Administrators (along with the Ontario Securities Commission) who enforce the Act have suggested that an Initial Coin Offering may be a security.
Each Initial Coin Offering will be evaluated on its own facts. Courts will assess the economic realities of a transaction.
If the coin/token is considered to be a security…
The cryptocurrency will have a lot of rules to follow detailed in the Act.
If you are trading securities, you need to be need to be registered (s.25) and you need to issue a ‘prospectus’ (s.53). Other obligations include know-your-client and suitability obligations to investors.
For now, it is a case-by-case basis as to whether a cryptocurrency is a security.
The debate continues – squash innovation and regulate the thing or let the chips fall as they may and let people enjoy the salty grease of innovation.
Why Do You Care?
The cryptocurrency space is big money. Around $5.6 billion was raised through Initial Coin Offerings in 2017 alone.
This domain is a target for money laundering, tax evasion and fraudulent investment schemes because there is:
- No central authority, and;
- Transactions are anonymous.
Anyone with network access can create or invest in an Initial Coin Offering.
To be honest – most people don’t completely understand this area (including us before we wrote this blog).
The good news? After reading this, you finally understand your friend’s boyfriend when he rants about blockchain and cryptocurrency.
Maybe you can even contribute to the conversation!