AML Regulations for Cryptocurrencies Panel – Full Event Video



so so anybody who knows me knows that I'm gonna start with a couple of quick disclosures sorry that was my bed just because I'm a compliance nerd well there are some lawyers on our panel they are not your lawyer and nothing that they say should be considered as legal advice we don't represent any government or government agencies so well we know a lot of things about how these work we're not going to be representing the official position of the Ministry of Finance of the Department of Finance rather a pin track of law enforcement of any other agency information should be free so if there's anything in this presentation that you want to use we will be making copies of the presentation public well if you use something we'd love to be credited if you choose not to do that we're probably not going to send an army of lawyers looking for you so get good information out there and into people's hands in terms of what's happening way back in 2014 we had an omnibus budget bill called bill C 31 and in that bill it said that dealers in virtual currency undefined at the time would be considered money service businesses at some point in the future before that came into effect there had to be regulation that was updated so the proceeds of crime money laundering and terrorist financing Act and the regulations that were related to that that thing happened in draft form this year this one so what draft form means is that it's not permanent don't panic don't go out and spend a bajillion dollars on a regulatory risk assessment it is a draft and until the beginning of September we are all able to submit comments on that draft which means you have an opportunity to tell the Department of Finance what works what doesn't work where they might have got it wrong any individual can submit any individual any company can submit comments and I would highly encourage you to do that so if you are looking at anything that we present tonight and you are thinking to yourself oh that's oh that's going to kill my business so that's really badly written you have an opportunity to submit comments about that and I would highly recommend that you do so one a final version is published we expect that there's going to be according to this draft a 12-month transition period which means once there's a final version of the law published it's not hey immediately you have to do these things tomorrow there will be some time to figure that out and get things in place so what does it mean to be a money service business or an MSB it means that you have to have a compliance program from an anti money laundering counter-terrorist financing perspective you need to have written policies and procedures which basically says here's the stuff that we have to do and here's how we're gonna do it you need to have a risk assessment and that's something that says here's how my business could be used to finance terrorism or launder money and here's the things that I'm doing to stop that from happening you need to have a compliance officer that's a human who is responsible for compliance at your company it does not necessarily need to be a specialized human like a lawyer or someone with a long background in compliance but it very much can be and if you are one of the larger exchanges like coin Square I would recommend doing what they've done and proactively hiring someone who has a really awesome background in compliance this is Charlene that's my intro to Charlene she's the AML compliance officer at Coyne square she's absolutely fantastic we also have the same thing that BitFenix has done so beside me is Peter Warrick he's a very experienced compliance person as well with a background in banking as well as policing also joining us we have Jason Beach Minh in an uproar who are both wonderful lawyers two of my favorite lawyers on the whole planet Earth and I can't say enough how much I think it's awesome when lawyers from different shops appear on the same panel before the greater good it makes me love you guys even more so these are these are very specialized people if you're thinking oh my gosh we're a start-up we only have four people on our team can one of us learn this stuff and be the compliance officer yes you can the important thing about the compliance officer is number one that they're going to know what they're talking about so they have to be willing to actually learn the stuff and capable of actually learning the stuff and they also have to have enough access to your management team to be effective in that rule so you can for example have someone who's your newest customer service rep on the the bottom rung of your junior scale that has never met anyone on your management team who is now your compliance officer they're gonna be super ineffective your regulators are gonna have a problem with that you have to have training and over here we have the wonderful gentleman who is going to be moderating our panel who is probably one of the best sources of free training on the Internet in Canada Stephen Stephen does incredible videos he was formerly a banker he's now at bit vinick's and we love you keep doing awesome stuff but training you need training for your whole staff anybody that touches customer funds anyone that touches crypto anyone that's dealing with information about your customers you want them to have any money laundering training and you need to have effectiveness reviews which is like an audit but for compliance so it's exactly as much fun as it sounds and I need to do it every two years and aside from that operationally you're going to need to identify your customers keep certain records and things like that so defining virtual currency I think is is incredibly challenging in terms of what's going to be regulated as money service business this is the definition in the draft regulation and something that's not a fiat currency so first of all kudos to the crypto community forgetting the words fiat currency to appear in legislation I think that's kind of amazing so that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds or Part B information that enables a person or entity to have access to a digital currency referred to in paragraph a so when I look at this I think it is incredibly beautifully terrifyingly vague what's not a virtual currency so we talked about funds and funds meaning something that is in a virtual currency and we talked about fiat currency and those things are defined as being different dealing in virtual currencies so the thing that we say is regulated what makes you a money service business they don't give a definition for what it means to be dealing in virtual currency but from what they're doing in the draft regulation you can see that certain things are meant to be captured so these include exchange or sending or receiving when you're sending you're receiving on behalf of another person or entity so so there's some interesting implications there those things all of those activities are defined and there are what I think are a couple of very astute exclusions so the transfer or receipt of virtual currency as compensation for validation for our transaction so essentially if you're mining if you're validating if you're adding blocks to the chain not considered to be something that's covered as MSB activity or some nominal amount that's there for the purpose of the validation of information these are really good exclusions I think that they are probably not going as far as they mean to you in terms of having exclusions and when you think of things where you think you know that's really not money service business activity I think I should be able to just run my lightning node and that should be okay and I want more regulatory clarity on those types of things these are the types of comments that really should be made about this draft so a virtual currency exchange transaction you're talking about one virtual currency for another or money for virtual currency and an identification requirement kicks in at the amount of a thousand dollars Canadian or more I think for a lot of folks the question that was how is this different from a Fiat to fiat currency exchange so with a Fiat to fiat currency exchange the transaction amount that would trigger identification is three thousand dollars large virtual currency transactions so ten thousand dollars or more sending receiving on behalf of someone else those would be covered what's very clearly not intentioned intended to be covered here is transactions to merchants so if you're buying consulting services and you're paying me then I'm not a I'm not a reporting entity because I accept virtual currency as payment with the exception of certain types of entities that are already covered so jewelers dealers and precious metals and stones and real estate so those types of companies that have to submit transaction reports for $10,000 or more in cash will have to do the same thing for virtual currencies politically exposed foreign persons heads of international organizations so and politically exposed me it's either domestic or foreign there would have to be a determination at a hundred thousand dollars or more in terms of a virtual currency transaction so this is very much in line with what exists for electronic fund transfers today in fiat currency and for anyone who's sitting there thinking oh man this sounds like a lot I should just move and get incorporated in Switzerland foreign companies that are offering money service business type services to Canadians are now going to be included in the regulation where they weren't previously so I think that that's important what's not and again what's not particularly well defined is what does it mean to target your services to Canadians in terms of joining the conversation we have some links here we've posted them in the meetup group so we have a brief survey and the survey talks about if you were to redline this regulation what would it look like we're going to be submitting some comments and we really want to hear feedback from people that survey can be submitted anonymously so if you're sitting here today and you're thinking I know exactly how I would change that but I really don't want anyone in the government to know my name fill out the survey I won't know who you are but I will value your feedback so we'll have this community event we'll have more to come we will be taking questions following the panel and I'm going to ask because we're on a pretty tight timeline that questions be actual questions so if what you want is to go on a super long rant about why you don't like the government and nobody should be regulated cool I'm totally willing to listen to you I have very expensive taste in wine and you will buy it for me after this panel and from there I'm gonna turn it over to Stephen and we'll get started thanks so much amber I really appreciate it thanks for the time I don't know if it's up there but Amber's Twitter account you guys should all really go check it out I think some of her tweets with a make Donald Trump blush like a little schoolboy so it's really interesting amber already did the introduction so I'll just get rid of all these cue cards but the joke's on you cue cards I've 494 more from mr. print I'm okay so we're gonna start actually with a question I want to start with Jason if you could change something about these proposals and amendments the way they're written what would be the first thing that you choose I mean I don't I don't know that I would change anything per se there's certainly some definitions that are unclear some wording that could use some massaging but practically speaking I think it's unlikely whatever comments are given there's gonna be any significant changes at all to these drafts they're gonna come out largely as drafted and then we're gonna have to deal with them I'm a litigation layer so I deal in the courts and we deal with statutes and regulations all the time and interpretation is the question in the courts so you look at a word like dealing or information what does that mean and you got teams of lawyers who get volumes of text books and other cases in order to inform meaning so there's gonna be a growing up period for these regulations they're going to come out people aren't gonna be sure what they mean we're gonna do our best to interpret them the government's going to take a different view in some cases and it's a certainty in my mind as a litigator that litigation will ensue to try and define some of these words so we'll go to the courts and we'll tell a judge what we think it means and the government will present their position and that's how we will define these terms with more precision how about you Charlene someone that has you know working in crypto and has an understanding of what some of these definitions should mean what would you change I made some notes I might just refer to them you know I've been around this legislation for a long time since it first was enacted for financial institutions and and I can say that my panel compadre here is correct they're not going to change significantly no matter how much redlining crying begging or screaming that we're going to do that says it's unfair for us as a for coin square being a digital currency trading platform you know the definition of what is dealing in virtual currency we know we're clearly covered under it no matter which way it's going to be sliced where I'm concerned about the lack of clarity in the definition is our customers that were onboarding and there are different interpretations of whether or not they fall under the definition and I pose this question directly to FINTRAC you know about asking for clarity we don't want it to be too prescriptive that it puts things into a box and it's it's too again too prescriptive as the government tries to be more what do they what do they call it something base to principles basis or II think that's the word but by doing that they leave us all in a little bit of a gray zone so we got if we got two customers doing the same thing and one says well I don't consider myself as dealing in because this is my interpretation and the other one says well I am and and you know we're saying well we want to be fair on the playing field to all people who are in our similar industries like we want to be a partner with people in the crypto space but we have to make a decision what our interpretation is now FINTRAC has offered to on a case-by-case basis offer you an interpretation but I know amber is pretty familiar with how their interpretations end up buried thousands of pages deep in their interpretive notes and there is a little bit of a lack of consistency even in them doing that now for existing institutions so I don't anticipate that they're going to get better at it doing it for cryptocurrency which is a market that they don't understand very well amber you were looking at onto that I was just gonna say but at least those things are public now mm-hmm yeah it was a time where they didn't share any of that so there's a lot of industry outcry to ask for that interpretation if you're telling one entity our opinion is this but nobody else knows about it isn't helpful so they do publish it it is you know a lot to get through that was literally thousands of pages of interpretation on their website although I do like the idea of putting them you know to task to respond back to this is what I do do I qualify but that's not really scalable for this market right like they shouldn't have to be answering individual questions if they could add some more color to the definition again without it's that's a tough line it's a delicate line to tow to put too much clarity lawyers can attest to that right and what's gonna keep you the busiest with these proposals which one would you change if you could I would echo the fact that persons dealing in virtual currency isn't defined I work on the regulatory side so I get I meet with a lot of businesses that are trying to figure out are we regulated are we not and right now there's just a lot of vagueness there and which makes it very challenging to give advice and also really makes it a risky decision because some businesses will take the view that they're not in their view dealing in virtual currency but it you know it really doesn't have the clarity that's needed for that there is some hope that perhaps over time both in terms of individual policy interpretations that FINTRAC gives and then sometimes they actually bring it together into you know more of a write up that's a kind of more more fulsome so maybe we will get something from pintura yeah so I agree we're probably not going to see any changes there are very few changes at this point to the regulations they've been approximately four years in the making with finance but there is some hope that coming out of FINTRAC will see something that will give clarity the other aspect that we haven't really talked about is the fact that the reporting requirements they're really really detailed and onerous and I think will be very difficult to comply with you know even for large banks let alone a smaller MSB and I think they they're not really practical so I think over time we do see changes from time to time and it may not be as a result of comments immediately so for example the ability to identify and they've added some language that makes it easier to move to kind of a digital identification moving away from the word original so you know they we do see sometimes that they they may not reflect it in the the revised draft in the draft stage but if they get enough feedback from the industry they do sometimes in a later amendment address it so hopefully we'll get some of that but you know that could be many years in the process Peter for you is there anything that you kind of like seeing from a vague standpoint that might benefit you working for a crypto exchange or is there anything that you would like to see change to help benefit what you do a bit for NEX well firstly I'd like to thank amber for all the work she's done in this space in particular and Rodney and outline I think and secondly I maybe take a slightly different view to my fellow panelists here in terms of the hope that things may change if if you know people speak up enough about it certainly the consultations I've had with FINTRAC and Department of Finance gives me hope and certainly there are some people there who pretty well-versed in virtual currency I don't use the word crypto by the way I think one of the things that needs a lot more Thor is the $10,000 threshold you know the equivalent value of fiat value of the virtual currency which can change by the minute and and also can be applied to 2,000 different virtual currencies so how you actually going to manage that how you're going to report you know if you'll exchange lists maybe 20 currencies tokens and you have to report in the case of it for next pretty much every single one because we have a ten thousand dollar funding threshold anyway like really how are we going to do that you know it has to be automated and how is the FINTRAC going to receive it you know and what are they going to do with it or do we just point them to the blockchain I don't know that's the one that I wouldn't say concerns me I know I think that's too strong a word but I asked the question well how are we going to do that I think that raises a good point though about having all these rules in place is you know we can talk about the things that concern us but what one thing that concerns me the most is how are they going to enforce them they currently have to monitor 33,000 more than 33,000 entities and by all accounts of the financial action task force reviews aren't doing a really great job of overseeing existing businesses and they've added in this new business whatever it's going to be defined as under dealing in but they've also added in this foreign angle and I've made the argument several times that it's really easy for FINTRAC to walk down the street and come to coin square and conduct an audit whenever they feel like it and anyone in here you know usually Canadian business people with Canadian based businesses FINTRAC has a reach out to you that is rather simple how are they going to go over to the kid in the basement in Malta and do a compliance review to make sure he's following everything that we have to follow it creates a very unfair playing field I think in the Canadian market space specifically if there's a Canadian regulator enforcing rules on Canadian based businesses in a way that they cannot and it is impossible to do globally so in you know and adding new laws are they actually adding you know not that I want more enforcement but you know as a compliance person it certainly helps to know that there's someone paying attention and knowing that if we're doing what we're supposed to be doing that the partners down the street the partners in another place are also doing what we have to do and if they're not and then it creates an uneven playing field again a greater market share is easier to get when you don't have to be compliant great now it's great technology companies here I know you cash is here and some great representatives from their company would you recommend and I'm gonna ask amber first what do you recommend that Bitcoin and blockchain companies are gonna need to start doing to prepare themselves for as I said owners reporting and just undertaking of am l compliance program I think definitely start start thinking about it start teeing up your technology start thinking about the types of information that you would have to collect and report start looking at your systems that you're using to identify people because how you identify people under this regulation is very prescriptive and there are things that you're probably doing that are risk-based that are that are really good that don't tick the box in terms of what they need to do and so you're really gonna have to start thinking about what things do we do both to protect ourselves from fraud and to truly know our customer and manage our risk and to identify people according to this regulation and those might be different things I'm sorry I know that'll cost money and and in addition to that if you don't already have a compliance person start thinking about what that's going to look like is that an external hire is that someone from within your organization and start getting them into the position now where they can look at the organization and see what needs to change over time so basically don't buy their Lambo just quite yet maybe start off with the Toyota Toyota Corolla yeah hiring a compliance person usually cost less than a Lambo so you know Peter I'm sure you would object okay what do you recommend Peter coming from a large financial institution and kind of transferring over your skills and knowledge what do you think that other cryptocurrency and blockchain companies are gonna have to do to prepare for this absolutely I think I'm amber's already alluded to this really understand the process of how to conduct a risk assessment and how that drives your plan your technology plan and things like that and you know one way of starting it is absolutely to hire a compliance officer or have somebody within your function who either knows it already or gets up to speed on it but I talking to Amber's company or whoever to me that's the starting point that drives a plan I think one of the biggest challenges for any exchange for instance is in the transaction monitoring piece of this world you know what a suspicious activity looked like in the virtual currency space I can tell you that you know in many ways it's very different depending on the nature of your company so for a trading platform for instance you know rapid in-and-out movement of funds is absolutely perfectly normal and it wouldn't be in a traditional banking space necessarily you know funds come in funds go out it's a totally different space and as you know Stephan and Charlene you know we're starting to get together to understand what those indicators are in this space and actually compile them and take them to the regulators and hopefully make sense of them Jason from a legal aspect I hear a lot about using and getting compliance professionals but with you saying that a lot of this will be settled and figured out in the courts what do you think these companies should be doing maybe from a legal aspect well I want to I want to pick up on a point that both Peter and amber made in terms of compliance it's critical to understand what is going to be expected of you in terms of know your client and transaction records there's there's really significant client identification reporting obligation so you gotta you gotta get the name address phone number piece of ID if it's a business you got to know the directors and officers of the business you know this is this is significant for this industry I think and it's gonna be a real sea change so two aspects of it from my perspective one is the operational perspective how are we gonna implement all that how are we going to collect the data how are we going to keep our transaction records how are we going to report and that stuff all exists already in the banking industry or casinos or other large scale reporting entities so I think that infrastructure is available but the more I think critical question for the virtual currency industry is strategically how is that going to change my business model and how am I going to adapt to that and you can hire a compliance officer but you know you know I think you also want to be thinking on a higher level from a strategic business perspective with your senior management team how are we going to deal with all of this I think that's a really good point Sharleen for you know a little boy or girl that looks at you want to start their own crypto exchange and they have Bitcoin dealer in their Instagram profile with you would you say to that person starting out that they should be looking to do first before they start updating their LinkedIn phrased it that way maybe we'll move it up to people in this space but for a little little boy or little girl to be like you better have some financial backing for this because it ain't gonna be cheap you know what I find I see a lot like I have a long history of developing compliance programs for traditional money service businesses in high-risk business areas in my past as a consultant and working in-house at financial institutions and I have to say that you know even those large established ones are still doing things piecemeal a little bit a little bit paperwork a lot of spreadsheets PDFs folder saved here and there that's gonna be really hard on a crypto to maintain and be able to meet these regulations so there's a lot of I mean there's a lot of young smart people in this space and getting as much automated and in the system to be able to pull data to put into fields for reporting to put into fields for record-keeping so you're not scrambling come regulatory review time or or just in general internal audit time to say well his name is on the system but his address is on a PDF in a folder and his phone numbers in a directory in his emails in his n Desk box and like you don't all you have to pull all these things together to have this customer profile so I think you know Peter makes a good point about the risk assessment because you all start out wanting to do everything and then you got to realize well here's what its gonna cost me to do everything and here's the risks that everything is going to bring so you have to set your risk appetite to say what am I willing to do what am I willing to invest in you got to have these policies and procedures it sounds like an easy thing to write what I would ask is that people don't fall for a sales pitch of selling you 150 pages copied off the internet a fin tracks website and call that a policy and procedure you need to be able to operationalize this in your day-to-day business and again that brings me back to the risk part choosing what you're gonna choose in what market target market you're gonna target what the money-laundering risks are that are there and then for what controls you need to put in place so some of this language about controls and assessment is newer in this space than just like yeah let's go get everything and like well here's what the risks are that are associated with that and here's are the controls you need to monitor for potential money laundering terrorist financing here's what we have to monitor for a regulatory risk reputational risk terrorist economic sanction risk might limit what you choose to do and where you choose to operate but I think if I can leave one final point maybe not for the kid it would turn off any child from getting into this space data field mapping to requirements what do you have in a system what is required where your gaps how can I fill it technologically versus you're gonna have to do some stuff on paper because we can't automate things like beneficial ownership and signing authorities for business entities but you can get pretty close if you have a lot of smart programmers and good people and good compliance people informing your compliance requirements that's amazing and they're not gonna prompt you with the question of how about these technology companies that state you know we're not touching the money we're not touching the curveball we're just a platform for these what should they be preparing for based on these regulations whether or not your platform you know what your business model is is very much fact-based and really dependent on exactly what you're doing and whatever words you're using to describe your business will only get you so far so you really have to drill down and understand to what extent are you a technology provider versus an actual entity that that's conducting business in this space but you know I certainly want to reinforce the point that Charlene is making on the potential rec tech solutions here and also there was a consultation paper that was issued earlier prior to this these regs coming out that suggested that FINTRAC is considering the idea of a regulatory sandbox and if we're looking at technological solutions that's certainly something that you know in the future if that's the path that FINTRAC goes down would be really helpful to put forward in front of them so I didn't want to lose that point before we move on and to say that rec tech solutions I think hold a ton of promise and I think regulators are open to them for the extent that they're actually achieving the policy objectives that they want to achieve just might not move as fast correct people most people in this field are very innovative they want to move quickly and the market moves quickly you can't wait too long but some of these things require thinking through and you know I'd wanted to echo Amber's point as well about the KYC solution because taking a selfie holding your ID is not acceptable under the current law and probably won't be going forward using biometrics is not yet available under the law so all the new cool things that people are coming up with may not at this point be acceptable so you got to think about that before you run off and build something that a regulator is gonna turn around and say no to and I hope that this sandbox can help push the weak you have to help push them forward too not everybody's walking into a branch with their passport in their hand it's not that model anymore so the non face-to-face rules in Canada are super onerous compared to most other countries in the world and I think we're changing that right slowly I think that's slowly getting better I also I think the other side of that coin that I can't stress enough is don't look at the way that you identify someone under the regulations and think it's going to protect you from fraud because you will get hosed so incredibly hard that you will be out of business in order to identify someone under these regulations you can match a credit file that has been in existence in Canada for more than three years with the name and address and date of birth of a person so if we're friends on social media and you've been to my house you can be identified as me under these regulations on the internet in a minute or less enjoy don't don't set yourself up for that know that you have to do something additional to protect yourself maybe a couple of segways of interest to me is one your question was about a company that's sitting in the middle and you know we don't touch any coin we just we're sitting in the middle so I think in an analogy of that would be Backpage who sits in the middle of the buyer and the seller for human trafficking for instance and look what happened to them you know there were consequences there and then the the other Segway was as Charlene said all the work that goes into collecting kyc etc and all this information and reporting information and things like that and then you've got three days once you form your suspicions to file your st in Canada well I can tell you that any bank would struggle with that certainly to put together a quality SDR certainly in the volumes that the bank's submit them three days I mean that's just impossible we all play games with that time with that time clock of like it's not until you decide it's suspicious we got to get FINTRAC to be in Department of Finance to be entirely prescriptive about when that start date begins they can't leave that open for interpretation they already do under the 30-day time line but we all play with that 30-day time line I find out about it I don't know if it's money laundering I need this much time to investigate it at this point I decide it's money laundering then the 30-day clock starts they don't like that we play games with that so I think they're trying to tighten it up but I think that's a good Avenue for us to challenge back in a professional manner yeah and you know fin tracks recently new strategy is intelligence for compliance as ours as STRs for compliance and then intelligence for law enforcement when it gets to fin tracked and you know fin check have been very complimentary as to the quality of the SDR submissions in Canada particularly in human trafficking and other crimes and you know some of these six pages long really detailed analysis and very very useful information identifies you know previously unknown parties and things like that and that takes time to put together even after you've formed your suspicions you've done your analysis to actually write a report essentially in the form of an STR and you've got another thousand to do as well if you're a bank you know that's the challenge it might be different for a small exchange for instance in a basement or something that submits maybe one a year or something that I think all this talk about writing STRs might be for some people in the audience like what is that even you know if you haven't had experience doing it and Peter you know Peters making a great point FINTRAC wants detailed intelligence and if you've never seen one or done one and there's no guidance out there about what that looks like you might be like I don't know I think this might be something and send it over they're gonna end up with again just like in banking where they got a whole bunch of garbage in and Regina's garbage out we're talking a lot of aha owners these regulations are so do you guys think with a lot of companies and blockchain especially going to different countries to incorporate in headquarters that these challenges in the amendments could prove to keep Canada way from being the blockchain hub that it should be I'll start with Jason on this one before I address that I just want to stay on the suspicious transaction ports for a minute because it's been a theme my bonnet for a number of years so a suspicious transaction report has to be filed where you as a reporting entity have reasonable grounds to suspect that someone's engaged in a money-laundering or terrorist financing offense so think about that obligation on you operating a business that's a criminal code offense so you're now interpreting the criminal code is somebody engaging in a criminal code offense yeah so and it really ties in nicely back to our original discussion with about the vagueness of some of the wording and these regulations that is incredibly vague in and of itself so that's never been resolved and still hasn't it's a him I'm waiting for the court case when I can help to find that but FINTRAC has issued guidelines pages and pages of guidelines and how you're supposed to determine whether something is a suspicious transaction or not and there's over a hundred indicators for for example for some sectors and I've seen one case where the reporting entity had monitored a particular customer as they came to the counter they have surveillance video they had a surveillance officer view that video determined that there literally wrote a report that says there's nothing suspicious about that person and then they were fined by FINTRAC for failing to file a suspicious transaction report FINTRAC pointed to their own guidelines and said oh well three of these 100 indicators you should have identified three of these 100 indicators and so it's suspicious so when we talk about we want more clarity in the regulations and and the act and when we want guidelines we also want to be careful what we wish for sorry for the aside that would be free out for suspicious transaction reporting they've just made more fields available on an already existing report that allows us to put cryptocurrency in there but you know the obligation to fill out the you know the disposition in Section G about your story of what is suspicious that's not change it's just a big giant text block so I'm not sure I agree and again I'm speaking personally not on behalf of anybody I'm not sure I agree that those fields are optional and there's certainly labeled optional and it's a bit like the guidelines they're guidelines it's not law it's fintax interpretation of the law but I can tell you as somebody that's been involved in a number of regulatory examinations they've become a regulatory expectation and the same thing as being law basically because you can get fined and things like that you know so I'm not sure about the optional labor if you have reasonable access to the information then populate it Jason is this going to be the next block Jane Island is what my question was maybe others on this panel or are better able to answer that question but certainly there are jurisdictions where regulations are more relaxed or will be more relaxed after these are implemented but with the requirement to be where foreign foreign entity is also regulated here at if you want to operate in Canada then you're still going to be subject to these regulations whether you're based somewhere else or not Sharleen how about you was it your choice to start in Toronto Canada or on the move you know it was coin scores choice certainly to start in Toronto and be a Canadian company and my choice to join it you know it raises a good point though I you know I think some people would say well if you make it too hard not just in cryptocurrency but any kind of business you make it too hard to do business where you know you're gonna go somewhere else and jobs can go and blockchain island could sink and you know Malta will succeed and the Lugg Switzerland and he's like so what's her land will succeed I do think it puts Canada at a great disadvantage if the laws here are well above and beyond other jurisdictions I don't know that the I don't know if that I would say the current laws are quite that far yet but they have the potential to get there and it's already requiring us to behave as though we're a bank without the resources size volume you know money profits of a large financial institution but we all still need banks at this point in time so if the law is not gonna make us do it the banks that we bank with will so it you know we don't necessarily have to blame the law for that one because a bank won't give us services if we're too great of a risk to them how about um where where are some of the jurisdictions that you've heard companies are going to and do you think Toronto can compete i I think that that's a hard one to answer because there there's reality and perception regulation exists no matter where you are and there are some jurisdictions that have really sought out to be more friendly but you are still going to be affected based on where you have your customers on where you have your staff on where you have your office so even if you're incorporated somewhere else but everything that you're doing is targeted to people in Canada I think that you're probably still going to be captured but for people that have have chosen to be here that people that are choosing to open companies here people that are choosing to stay here thank you I I can't speak for everyone but I love you I'm glad you're here I'm glad that there are services for Canadians and and please stay please keep doing what you're doing we'll help you figure it out Peter do you wanna add to that about jurisdictional issues yeah I think you used the term blockchain you know to me that the blockchain is a bigger thing although if you want to understand the blockchain understand Bitcoin obviously I think the potential for blockchain technology in Canada is huge and it's already here and we have some brilliant people probably in this room tonight actually but I separate blockchain technology from virtual currency I think you know any company that wants to come to Canada why would they if the regulations are so on their own as you put it and I'm not sure if they are onerous I think that's a strong word at the moment and I think you also have to distinguish between convertible virtual currencies in a sense of conversion to fear as opposed to virtual to virtual I think that's a totally different thing and a potential opportunity for Canada for instance in the in the trading space you know CBC virtual conversion how about UNR do you see any more blockchain there cryptocurrency friendly jurisdictions that could close competitions in Toronto or Canada in general security side so on security as I would see Switzerland and Singapore very much attracting entities willing to or wanting to do some sort of coin offering for example more frankly because there's more certainty in those jurisdictions and more vagueness here on AML I don't think we're out of touch I think we are like other jurisdictions grappling with how to do this it would be nice if there was more harmonization and I think that will come over time but I'm not seeing Canada's seen as an outlier in terms of being more onerous or more difficult to deal with I think every jurisdiction there's there's a struggle on how to apply MLS in this context so I'll just actually has one more question before we go to the audience because some of them seem like they're really looking forward to asking some questions so de-risking now that these regulations will come into place it looks like you know the regulator's are doing a great job of collecting information for reporting entities do you think there'll be a less chance at the risking because a lot of these crypto and blockchain companies will be in compliance oh and with amber because I know Rodney and David are gonna jump on stage and jump in on if you're risking so I'll start with Charlene we'll work our way down the panel with de-risking I mean I went through it in the early 2000s with the original MSBs as you know all the bank's said ah you know we just can't be bothered it's too much work like it you you know you have this risk and we don't understand it so we're gonna run away from it you know a lot of banks got in trouble for just taking big swaths of clients that saying we're not dealing with any Iranians because there's a brainian sanctions we can't deal with the risk we're just I don't know I call it old wine new bottles like we're the latest thing to de-risk and cryptocurrency digital currency anything blockchain related and I mean I do think that's where regulation can help minimize our ability minimize anybody else's ability to de-risk us like get us out of you know their business area because right now the you know the sent the statements about us are well you're not regulated and you know unregulated entities are of course always attractive to criminals but that doesn't mean that every one of them is in fact you know harbor and criminals right so I say you have to take you actually have to do the work to do risk mitigation not avoid the risk by becoming regulated we have that at least we have done in our pockets to say we're not this Wild West that you think we are looking we're complying with the same rules that you are and obviously I'm speaking directly about financial institutions de-risking of the digital space but I think it you know it did a disservice to money services businesses post 9/11 you know back in the day it's doing a disservice to us now and this allows a step forward to say we are regulated we're not you know what you think we are and we're following the same rules as you and then institutions have to decide are they going to take the risk or are they going to continue to walk away from what is a growing not going away market did I say that rant enough I think like don't don't deem risk I think that term de-risking I hope you jump all over it right and that you see bigger financial institutions opening up their arms now to cryptocurrency exchanges as long as they're following these regulations or is that a stretch there's a regime entities could point to that I know I've had some clients in the past that were in a stage that FINTRAC would not allow you to register because that there wasn't yet the regulation and so they were in an odd position where the bank would say well we think you're our money services business and then FINTRAC would say actually you're not yet and you can't register and then they end up in a very weird situation where it's hard for them to show the bank that they're properly supervised from an AML perspective so I I don't I think you'll be helpful I give certainty I don't think it'll be a wholesale opening of the arms I think there's still a perception of risk in the industry and I also think some of the aspects of the regs actually put a lot of obligation on the FIS when dealing with entities that are in this space and so that's a lot of work and depending on the size of the FI and and you know the profitability of this sector they may not be so incentivized to take on clients and in this business while piggybacking on that Jason what do you think in regards to the risk reward trade-off for financial institutions dealing with blockchain companies well I think that's exactly I agree with Anna's point that that's what happened with Ms B's is it just you're you're not a significant enough player for us to assume the risk of trying to work with you and so we're just gonna we're not going to bother and you know I think we can look at it as a struggle or as an opportunity and my fellow panelists are quite right that it adds certainty and adds predictability it adds a framework so that these businesses can operate together within an agreed upon set of rules so if you can innovate and find the way to develop a platform that a financial institution will accept and incorporate then that's an opportunity here for you to look at and as a way to adapt your business or grow in a different way so I think there's this this is a change but it's also an opportunity to spawn a lot of innovation and new ideas and as others have said there's a lot of smart innovative people in this room so I'm looking forward to seeing what's gonna happen Peter helping build up our B C and B Mo's risk and AML programs do you feel that some of the financial solutions seeing people like you and Charlene and the crypto space will be more accepting to bringing in your exchanges to their to their portfolio I'm not sure about Charlene's exchange but no I mean Charlene myself and others are really putting together pretty robust AML programs as good as any bank basically given the resources that we have and to the highest standards of any bank certainly in Canada I think I've always seen risk as an opportunity I see risk of speculative risk not just a negative thing certainly certainly certain banks in Canada I think would be very open to to onboarding and actively engaged in talks with various exchanges around the world about onboarding ones regulations come in I think any of the banks are afraid to go first but definitely there's an opportunity there and it also goes to the bank you know I've just left a bank and put a great deal of effort 150 people through their CPP many of them trained with block geeks the certified Bitcoin professional to get people aware in the banks understand the risk and then if you understand that you can manage it so I definitely think there's opportunity and were you recently completed a special project discussing the risking if you run this same special project where you're seeing how many financial decisions are accepting MSBs or similar cryptocurrency companies do you think there'll be a huge change in the next three years I'm extremely cynical but I very much want the answer to be yes I I hear murmurings of things that make me extremely cautiously optimistic so there are a couple of banks in Canada that are dealing with actively dealing with cryptocurrency companies openly dealing with cryptocurrency companies I and I think that that's excellent I hear murmurings from the ones that aren't that there is definitely an interest in that they are trying to figure out how to do that so I would be thrilled if we turn a corner on that perfect I just want to say to the crowd if we could just thank the panel for giving out such a great discussion this microphone doesn't go very far so if anyone has a question maybe they can just stand up and try and keep it relative to the subject matter and maybe not go into their personal business model and how they can personally help you in the twenty seconds that you have for them to answer the question is anyone that had something great well sure yeah and I think you know back in the day when I was working in that industry these were long-standing operating businesses that had you know anywhere upwards of thirty year histories of banking relationships that suddenly overnight became persona non grata and were booted out Syria is obviously that's a serious risk to their business operationally and that they're not able to achieve their business you know it's a little bit opposite for the crypto space where people are just getting started and building these big ideas and then it comes to a point where they need a bank and it's like the doors shuts and like what do I need to do to get in in this field of regulatory uncertainty I don't know if that sort of answers your question but it's it's just a little bit opposite but I think I always make this parallel to an uber started when uber started the taxi industry was super pissed off lots of they have a strong lobbyist group insurance companies were saying you can't drive your personal car for a business purpose of you get in an accident we won't insure you he started cutting people off well guess what it took one insurance company to say you know what well will insure you I'm gonna charge you through the roof for it your premiums are gonna be super high but come here and then the rest of them had no other choice but to do the same because they were missing out on a market share so I think that's there is a lot of FOMO not just in the digital currency space but financial institutions saying we don't want to get left behind whether whether it's digital currency or anything blockchain based you know some banks may be saying no on the front of it but in the back of it they're sure working on it themselves and developing in themselves I think it's an undeniable it's an under my undeniable evolution that they're gonna have to get on board for it doesn't necessarily mean they're gonna bank every exchange on the on the block or foreign ones that want to operate here under their new fit track MSB license but I think you know to Peter's point of thanks getting trained and taking the interest it's gonna take you know a one of the good big ones to start opening their doors and the rest will follow suit yeah I agree with that and I would say that crypto cryptocurrency companies virtual currency companies are way ahead of where Ms B's were Wendy risking started to wit when I started consulting Charlene and I work together and at one point I was a banker before that and I said I don't know if I want to work with MS B's I don't know if I'm interested in that interesting ms B's operating out of basements of people's houses in weird parts of town and there's strange things but there were also amazing ones and the the first thing that she did as my colleague was brought me to a place where there was someone that served the community it was remittance to a community that primarily dealt in cash in the recipient country because people were largely unbanked and within the community in Canada they did things like had legal services that were available in their own language because a lot of people were involved with abusive system the bus every payday whatever I didn't like up all the names you used to help them give their money to send overseas it it was so it was just a beautiful community that they had developed in terms of the additional services that they offered that had nothing to really do with with money but in terms of just building community protecting people helping them immigrate to Canada helping them get in touch with lawyers that spoke their language and it was incredible and what I had thought as a banker was that money service businesses were all predatory that they were charging higher rates than the banks which is not true in all cases in in in some but I I just didn't understand the value that these services were bringing to communities you see it right until you see it probably the similar view and crypto ring yeah so either digital yeah so so the service that you've done Peter and when you were in house at the at the I think it's tremendous yeah maybe I could talk to that a second so again I speak my own opinion I recently worked for a major bank as the Terminator as was part of my role so what I mean by that chairman of the D Marketing Committee D market do you risk injury and I can tell you that you know we took do marketing extremely seriously in the sense that it's not a blanket approach that every case is different every case is assessed against quite a complex and meta metric matrix of risk and I can't actually recall do marketing very many SMS B's at all and actually the the bank I I've just left was the one that actually kind of opened its arms to immerse bees and probably banks probably 80 90 % of the EMA speeds in Canada and so that takes me back to what can you do to prepare so with my the market chair hat on you know I would be looking at your AML program I would be looking at your risk assessment that you actually done one that you have your policies and procedures and then you actually apply them you do what you say that you're going to do and it's operationalized and and if you do that in preparation for when the recs to who come in in whatever form I think you even far better chance of obtaining banking services and things like that certainly with one certain Bank that I'm familiar questions go ahead please stand up so the question was can cryptocurrencies be used to violate sanctions and if there's something that can be done about that and we'll start off start off with Peter absolutely of course they can any form of financial transactions can can be used to violate sanctions I can tell you that any exchange probably every exchange in the world is extremely alert to that so you know as with a bank you do your watchlist scanning against various sanctions list you monitor the IPS you monitor the VPN usage you do as much as you can to to identify those sanctions issues and probably in in the crypto world I'm just thinking out loud here you might even have a better chance of detecting that maybe then in the banking world but it really it's no different from banking I won't say this though if you are on a sanction list right now you're probably not opening any accounts in your own name so you know sanctioned lists are reactive and people's names and business names are on them and the people who are on them know they're on them so they're not about to put their own name on something we screen lists after the fact and again you know I've been in this for a long time and I can remember only a handful of actual hits when the lists first came out and it's and you're like oh now this person's a terrorist okay let's see what we have on them from that point forward there isn't gonna be people if I mean at least you know then you only catch the dumb ones right I mean they certainly can be used but I don't know that it would be as obvious it's not obvious to banks because I don't think any terrorists are walking into banks opening accounts and there names yeah if you're if you're screening if you're looking at IP addresses you're probably not seeing a lot of traffic by which I mean any traffic from North Korean IPs but we know they get money somehow yeah I think in the traditional space you know there's heavy use I think of trade based money laundering type topologies import-export complex company relationships shell companies holding companies things like that to facilitate that sanctions reach I'm not sure if the crypto world is as friendly to that can one of my lawyer friends talked about what the due diligence defense means in this in this case and how that would apply well so if your thought to have breached the actor regulations there is a defense where you can say I was duly diligent which boils down to I took all reasonable efforts to prevent the offense I did everything that was required of me to monitor it in theory it's a defense available to you in practice it's unbelievably difficult and a high bar that the courts don't generally accept so I you don't want to rely on that as a defense you want to you want to prevent any non-compliance before it happens with respect to sanctions laws there's a lot of provisions that are strict liability so due diligence defense would not help you so there's lots of companies out there that sell lists and make lists available and it's one thing I look for when we are doing enhanced due diligence on other quasi regulated at this time digital based entities you know for anybody in this room is building a business that has anything to do with the movement of funds whether they be digital or not screening is the first thing that I want to know that people are doing it's you know again it's not going to yield the output that we think it is but the fact that you're actually doing it and you have enough information on your customer to be able to properly match or discount a potential hit there's well over oh god I can't remember the last time I counted I want to say over 6000 names on the Canadian list alone let alone all the global lists again I'm not anticipating that you all are harboring terrorists in your platform but like at a minimum have a look it's called a that they require it on a what is it not frequent basis but on a regular basis you know that's that's interpreted differently by different institutions banks do it nightly if not hourly if not minute Li you know smaller less risky institutions could probably get away with doing it weekly but please do it whether or not you're an MSB and that's certainly something I do a lot of diligence for investors and and other you know entities wishing to acquire you're taking ICL money from someone from a sanctioned country or sanctioned entity or party and then you try to convert that at say my exchange I'm not going to really want that happening so yeah that's certainly a gap that I see repeatedly that entities that I think that because they're not subject to the ml legislation they're not subject sanctions laws that's not the case everybody's subject to sanctions laws we have time for maybe two more questions say on that that the US has kind of an outsized influence on financial services regulation it and probably you know regulation generally so the fact that cannabis is not legal under federal law in the u.s. is what leads a lot of Canadian banks to be apprehensive about dealing with entities in that space and and the u.s. is very aggressive on enforcement and as you say they're very keen to be extraterritorial because they're really worried about that point of regulatory arbitrage where other jurisdictions may be able to do something and as a result gain and yeah gain an advantage so certainly you know the US and what's happening there is the remains always of high importance and has kind of an over an over sized influence on kind of the global regulatory landscape anyone else want chime in um so I just wanted to say that from a fat-cat perspective Canadian MSBs are not actually covered so so if you're operating a business that's going to be considered dealing a virtual currency and you're worried about being an MSB you will not be a factor regulated entity well yeah I I'm sorry the boot of American imperialism is descending on you I can't help you there yeah they've taken out the the definition of an EFT is a swift Mt 103 but they in the consultations that we attended with the federal government I haven't seen a clear definition of what they mean by an electronic funds transfer because it says for those of you who haven't worked in this industry or in compliance and money laundering there's a reporting requirement for international wire transfers which were defined as Swift MT 103 s that leave the country or come in from outside of the country and they've taken out the MT 103 definition and I think this is a bit sneaky because we're all focusing on the crypto stuff but they've made little changes to other parts that have an impact on not only every other already existing reporting entity but those of us who are waiting into it new that they haven't defined what they mean by electronic transfers and doesn't mean bill pay and doesn't mean you know Interac online payments and you know that's yeah that's ridiculous I'm sorry there's no way that's up that's up even possible to automate it's just it's too much oh it's excluded okay sorry no because I yeah well domestic has always been excluded it's always been international but what they've changed is what electronic funds transfer means it's because they don't lay fines yeah so we're talking about compliance so what happens if you don't comply under the proceeds of Crime Act and regulations FINTRAC has administrative monetary penalty powers they can fine you among other remedies but there that's their first line of defense so you'll get an audit you'll get a letter saying you're deficient and then they may further proceed with a notice of violation and they'll list your deficiencies and they categorize the deficiencies as minor serious or very serious minor is up to $1,000 per instance serious is up to $100,000 per instance and very serious it's 500,000 for instance so think about kyc obligations you've got to collect all this personal information about somebody if you don't collect their occupation that's a minor violation if you do 10,000 transactions a day and you don't collect occupation information for any of those 10,000 transactions you could be cited for 10,000 violations that's big fine if you suspicious transaction report which we were talking about earlier it's a very serious violation so that can be a 500,000 dollar penalty and I'm aware of interact proceeding on a case where there was one failure to report one transaction and they find the reporting entity half a million dollars for that one transaction so you got 1,100 failures to record occupation and you have one failure to report a suspicious transaction you have a 1.5 million dollar fine worst case scenario right this and what what we've seen the pattern of fin tracks enforcement is they they want to name and shame so they want to set examples in various industries they picked somebody in the casino industry they picked somebody in the banking industry there isn't too many major major players and MSB so they picked a bunch of littler ones and really went much harder at MSB says they couldn't have gone after Western Union or it was it was easier well they got a lot of pushback from the banks and the casinos and so they went after the easier fish which was the MSBs and they kept right they could get people who couldn't afford lawyers and then they got some fines that they could then publish an accounts so I would expect that this industry will face something similar but at the point was I think Charlene's point earlier is that there's no way they can enforce the entire industry and audit everyone so they'll make some examples of people and they'll try and move with a big fine so that everyone gets nervous about it well that's what I'm anticipating too because they've been pulled off of the ability to find fin fin track got in trouble because somebody challenged them on their finding regime previously that's my fault yeah six people there's there's a whole bunch more that we don't hear about but there was one in particular that went all the way to the Supreme Court that caught Kabul farms it's called they were operating as an MSB and got a six thousand dollar fine for not for laundering money but for failure to have a compliance regime and various things under that and they fought back and then Fincher it was it was called out that FINTRAC needed to pull back they're fining go undergo an examination by the federal government committees to explain themselves their mandate their ability to achieve their mandate how the fines contribute to and enforce compliance in Canada and what the result was was that they're not allowed to lay a fine I think it's been about a year so they've got another year that are not allowed to lay fines again until they clean up the regime so I think the changes that you're talking about that they dropped in is maybe some attempt to clarify yeah cuz they were forced to so they were forced to be yeah yeah so what I what I anticipate is that they will come back with some uh vengeance to prove themselves and and like you said make examples of some people pick some maybe low or medium hanging fruit to say you didn't think we were finding well enough before well look at us now I think certainly if there are examples made it will be with the lower or medium hanging fruit that can't tie up a process illegally for next ten years having said that you know fin tracks strategy certainly under the past director was one of measuring effectiveness as opposed to a checklist you know you didn't do this you didn't do that or you you missed one or something like that and certainly with project protect you know that was a big driver of that and an assessment not human trafficking but an assessment of the effectiveness say of a banks AML program that they are trying to do the right thing they are submitting you know numbered numbers of SARS they do have generally the right a good program okay they missed a few things I think there's some leniency built in there and I I'm not sure if that will change in the crypto space in the virtual currency space but if it does it will be the low-hanging fruit I think that can't afford expensive lawyers like Jason that's amazing so that will conclude tonight's panel discussion I want to thank amber Peter Jason and Charlene I want to tell you guys if you go to the meetup group that amber was talking about there's some really good links to some of Amber's material on the subject as well as there's an article from Anna and there's commentary in the Bitcoin magazine from Jason so there's about six or seven pieces of documentation that these people are spending their whole weekends going through and summarizing for you so it's a really good checklist to go understand the information and maybe bring back to some of the people within your company thank you guys so much and let's enjoy the rest of the evening networking say a big thank you to block eats for for hosting us and for filming for generally educating the community and being awesome we love you guys take care guys

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