Are Bitcoin Exchanges MSBs?
The Québec Government’s Authorité des Marchés Financiers (the “AMF“) today issued a News Release announcing that businesses that operate digital currency ATMs and “platforms for trading virtual currencies” must be licensed by the AMF as money services businesses (“MSB“) pursuant to the provincial Money Services Business Act (the “Act“). It also issued a Policy Statement to accompany the Act to reflect how “platforms for trading virtual currencies” and virtual currency ATMs will be governed. Generally, in law policies are non-binding.
Apart from these ATMs in Québec, it is unclear what else in respect of digital currency businesses need to be licensed.
The Policy Statement does it define what a “platform for trading virtual currencies” is and it is not obvious whether that means digital currency exchanges, or a website, or neither, or both, or something else entirely.
The Policy defines “currency exchange” as the exchanging of currency or legal tender money for another, based on an exchange rate. Digital currencies are not currency or legal tender so “platforms for trading virtual currencies” are not currency exchanges but there are no other definitions that could possibly be relevant in the Policy Statement.
With respect to ATMs, the Policy Statement says that digital currency ATMs are considered ATMs for the purposes of the Act only when they sell digital currencies for cash and provided there is no human intervention in the transaction. If an ATM transaction has human intervention, it is not a MSB and licensing is not required. Presumably then, a Bitcoin company could legally avoid licensing in Québec with an ATM by ensuring human intervention in the transaction. It is not known what is meant by human intervention.
Under the Policy Statement, customers of digital currency ATMs do not have to be identified before the MSB provides serves to them.
The Act requires that MSBs be investigated by the provincial police and found suitable to operate the business. In addition to a criminal background check, the police will determine the moral character of the person. MSBs must disclose and obtain security clearances for, associates of the business and all of its lenders.
MSBs must also disclose the names of all of its employees, as well as its directors and officers and their personal information, and file a business plan and financial statements.
A business that has any connections to a person in organized crime will not be regulated to operate a MSB.
The legal obligations imposed on MSBs pursuant to the Act are here.
Senate Hearings
The issue on what is required to be licensed in Québec in respect of “platforms for trading virtual currencies” was discussed when the AMF testified before the Senate Banking Committee on March 12, 2015.
When the AMF was asked about its licensing regime by the Senate Committee Chair, Irving Gerstein, the AMF testified: “At the moment, there is no regulation of virtual currencies, including Bitcoin…it’s a little ‘No Man’s Land’.” Senator Gerstein said that he understood that the AMF was going to require a permit for ATMs but he wanted to know whether the AMF was going to license  exchanges.
The AMF testified that if a digital currency exchange transacted Bitcoin that was not securities (in the securities law sense), it was outside the mandate of the AMF. If what was exchanged was securities, they said, the exchange would fall within the legislative framework.
The AMF’s specialist elaborated to testify that if a digital currency exchange transfers money directly from one person to another person, it is a transfer of funds, ergo a MSB and the Act applies. A “platform”, the AMF testified, means a system like PayPal except with Bitcoin. If, the AMF testified, there is a transfer of currency to purchase (or sell) Bitcoin, such a business must be registered as a MSB.
Senator Massicotte said that such a service, as described above, was an “exchange” and noted that the AFM had testified that such exchanges were not caught by the Act, to which the AMF only replied that the nuances were very important in the Act and that what they are regulating is MSBs.
At the end of the Senate hearings, it remains unclear just what services must be registered, apart from ATMs.