Mark Fancourt-Smith and Alix Stoicheff speak with Scott Lucyk about blockchain technologies, cryptocurrencies, and how this emerging market is facing new regulations in Canada.
Mark Fancourt-Smith and Alix Stoicheff speak with Scott Lucyk about blockchain technologies, cryptocurrencies, and how this emerging market is facing new regulations in Canada.
Mark Fancourt-Smith 00:15
Welcome to LawsonInsight. I'm Mark-Fancourt Smith, a partner in Lawson Lundell’s Vancouver office.
Alixandra Stoicheff 00:20
And I'm Alixandra Stoicheff, an associate in the firm's Calgary office. On this episode, we will be speaking with Scott Lucyk about cryptocurrencies.
Mark Fancourt-Smith 00:28
Scott is an associate in Lawson Lundell’s Vancouver office and specifically in the Commercial Litigation group. Scott, we're so happy to have you on the podcast today.
Scott Lucyk 00:37
It's nice to be here, Mark.
Alixandra Stoicheff 00:38
Yay, thanks for joining us.
Mark Fancourt-Smith 00:39
So, before we dive into specifics, it’s probably helpful if you can just walk our audience through what blockchain technology and specifically cryptocurrencies are.
Scott Lucyk 00:42
Yeah, so just before we get started, I think it's important to note that given how new this sector is and confusions about what it is, a lot of this podcast will be focused on just laying some groundwork and giving people an introduction. So they can start to understand some of the key concepts and players and actors in the cryptocurrency and blockchain space. And where there are legal developments, I will also be highlighting those. So essentially, what blockchain is a distributed ledger technology that allows an immutable, publicly verifiable way, in most cases, to record transactions, including the exchange of largely of digital assets. So in practice, what that allows people to do is to have essentially a trust layer over the Internet that we did not have before. So before, if there was always the need to have a third party intermediary, whether it be a bank, or PayPal, or Visa, or some type of third trusted third party to record transactions over the internet, but now with blockchain technology that can be done, essentially, just by running the software. And so that is a massive new innovation. That's, that's been described as web 3.0. Cryptocurrency or virtual currency is one iteration of blockchain technology. And so different types of cryptocurrencies, but essentially, what Bitcoin and other cryptocurrencies do is they allow for the transfer of value across the Internet, and the store of value across the internet, again, without any trusted third party, such as a bank, or an exchange, or Swift. That is a technological basis, and we're also seeing, you know, broader applications of blockchain technology, but the one that is kind of first poking its head up and most people know about is, is of course, virtual currencies and Bitcoin being the being the kind of the blue chip cryptocurrency.
Mark Fancourt-Smith 02:43
So essentially in in cryptocurrency, now that we've, we have the trusted ledger and can solve the problem of I guess, what, what was previously referred to as the double spend, the risk that that someone would use the same asset, again, we have a new asset class and one that that's becoming increasingly significant, isn't it?
Scott Lucyk 03:02
Yeah, so absolutely, Mark. For a long time, you know, Bitcoin, for example, first kind of came onto the scene in 2013, and then had its first major run in value and also in publicity in 2017. But even up until recently, you know, the story around cryptocurrencies has often been you know, it's a scam, or it's something that, just very tactically astute people are doing and kind of the play project, but most recently, it is becoming acknowledged widely by institutions and government as an emerging asset class. Just to put some numbers on that to help people kind of understand the scope of this. So at the recent peak of cryptocurrency value in May 2021, the value of all cryptocurrency was approximately $2.5 trillion US. And to put that in perspective, the approximate market value of all gold in the world is some room between nine and $10 trillion. That means that at it's most recent peak cryptocurrency was approximately had to value approximately a quarter of the entire gold market. So this is no longer, you know, simply an interesting toy thing for technically adept people. This is this is more and more becoming mainstream. And I think that, you know, we see that in the investment side where increasingly, institutions are offering custodial and investment services, everyone from Goldman Sachs to, you know, certain pension funds, for example, or we're starting to see investments in cryptocurrency and related businesses. The other quite fascinating kind of mainstream development is what's referred to as central bank digital currencies. Now, we haven't seen one yet that's fully active in the marketplace. But just to give you some idea of how significant these changes could be. So just to define the term, so a central bank, digital currency is essentially just a digital bank note. So that would be, you know, for example, a digital version of the Canadian dollar or the US dollar. But in a recent study by the Bank of International Settlements, they found that 86% of central banks globally, are actively researching the potential for central bank digital currencies. 60%, were experimenting with the technology, and 14% of central banks globally, had already deployed pilot projects. So again, you know, and that includes China, and, you know, as recently as today, discussions by the US Federal Reserve Bank about potentially investigating that technology, so it is certainly becoming much more mainstream.
Alixandra Stoicheff 05:40
Well, and so with this proliferation and the increased value that you mentioned, I understand that there's new regulations that are being applied to cryptocurrencies in Canada. And I'm wondering what you can tell us about those and what effects those regulations will have on Canadians who are interested in investing in cryptocurrencies and who are using it in the course of their business?
Scott Lucyk 05:59
That's a great question and I think it's one that a lot, a lot of businesses and consumers are asking themselves right now. Historically, because this is such a new technology. There has been regulatory uncertainty in Canada and other jurisdictions around the world. What we're observing is governments and regulators slowly catching up and adopting previous models and previous paradigms to this new technology. Most recently, the Canadian federal government issued a series of regulations aimed at anti-money laundering legislation with respect to businesses that are dealing and what they define as virtual currencies. Essentially that that means any currency that's not issued by national government. And so any businesses in Canada that are dealing in virtual currencies, first must registers as a money services business with the federal government's FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), anti-money laundering and know your client regulations that traditional financial institutions are subject to. So that would include threshold reporting for virtual currency transactions, over $10,000, in Canada, and also just basic information about the client and their underlying identity. Again, these particular regulations are aimed - at the - to support anti-money laundering laws in Canada.
Mark Fancourt-Smith 07:24
Now, as people are increasingly making significant investments or put another way, investing significant portions of their net worth into crypto, what are we seeing in terms of regulation of the exchanges themselves?
Scott Lucyk 07:37
Yeah, so I think for listeners who may not be entirely familiar with this space, it's an interesting question or worthwhile question to ask, “Well, what actually is a cryptocurrency exchange?” So typically, traditional exchanges are ones that we know about, like the TSX, the Vancouver Venture, New York Stock Exchange, you know, those were traditionally the places where people could transfer assets and securities. Crypto currency exchanges are, for the most part fundamentally different. They are accessed online through websites they often don't necessarily have a physical headquarters. I mean, they may be registered in Canada, but oftentimes the actual operations are not taking place in Canada. However, as you mentioned, Mark, there are very significant amounts of wealth being transferred through these exchanges. So the question then becomes, well, how in this new paradigm, do we protect consumers and provide some basic regulation around the activities that are going on in these cryptocurrency exchanges? The answer is, is that slowly, particularly in Ontario, we are starting to see some actions from the Ontario Securities Commission with respect to cryptocurrency exchanges that are operating in Ontario or serving Ontario clients. So the most recent kind of headline news was the largest cryptocurrency exchange in the world, which is Binance recently, stopped servicing Ontario based users, in part due to the regulatory actions that the Ontario Securities Commission had taken against other cryptocurrency exchanges. So the issue there is not so much, or the way it appears to be going is not necessarily so much, that regulators in this case, the Ontario Securities Commission are saying “We don't want our citizens people who are in the in the province to, to not be using these exchanges, but if they are, those exchanges have to be in accordance with securities regulations”. So that gives cryptocurrency exchanges, the choice often to either take on the expense of complying with the regulations in each specific jurisdiction, or in the case of Binance, an Ontario residents, choosing not to no longer serve those customers. So in the case of Binance, they recently announced that they are not going to be they're no longer be serving Ontario based clients. And they asked that all Ontario based clients remove all their assets by the end of 2021. So I think that, you know, that is a major step. But other cryptocurrency exchanges such as Wealthsimple, for example, have decided to comply with regulations and to invest money to become compliant. So it's a little bit of a mixed bag about how cryptocurrency exchanges are reacting to regulation.
Alixandra Stoicheff 10:41
And so on that note, so yeah, we've talked about how this is an increasingly regulated field and how those regulations are applying to virtual currencies and the exchanges, but I'm wondering whether there's any sort of increasing or changing regulations that consumers should be aware of?
Scott Lucyk 10:58
Users should know that they're going to have to be complying with basic anti-money laundering regulations and certain reporting requirements for transactions over $10,000. And they should be aware that in certain cases, such as you know, in the Binance and Ontario example, that they may need to transfer their assets and their trading activities to exchanges that are that are going to be subject to local regulation.
Mark Fancourt-Smith 11:26
Now, people have become increasingly familiar with the idea of virtual currencies, but I wanted to ask you, and this sort of goes back to the our first question about blockchain technology itself, what other financial areas or activities are we seeing crypto or blockchain technology expand into?
Scott Lucyk 11:42
I think the major messages is that it’s starting to become more mainstream. Recently, El Salvador proposed a law under which Bitcoin would be accepted as legal tender in the country, and so one of the ramifications in El Salvador is that, you know, vendors must accept Bitcoin, just like they accept the regular local currency there which is in fact the US dollar. The other one is colloquially referred to as DFI. DFI stands for decentralized finance. If you think of Bitcoin, for example, or one of the other kind of blue chip cryptocurrencies referred to as Ethereum. In particular, Ethereum is the best example of this. So if you think of this first wave of cryptocurrencies, what this really is, is setting down the infrastructure, the pipes as it were of a whole new way to transact value. And so in the cryptocurrency world, that's often referred to as layer one. The next step, which is referred to as layer two is where increasingly applications are being built on top of the central infrastructure and, and DFI is an area that covers many different kind of functions or use cases. But I think the best way to think about DFI is it is replacing traditional financial institutions. What the Ethereum network allows you to do is not just to transfer Ethereum the native cryptocurrency, it's actually a network that allows you to exchange other assets that can be exchanged on the network, so you can exchange a token that is representative of one US dollar or other digital assets that are representing value can be exchanged over that network. And so, with that technology, we are seeing things like cryptocurrency banks, there has actually been some bonds that are actually been issued on the cryptocurrency network. So again, this DFI, this layer two is kind of the build out on top of the infrastructure that's been built over the past 10 to 15 years.
Mark Fancourt-Smith 13:38
We'll be fascinating to see what you know, how governments and other regulatory bodies deal with that emergency as well. But I wanted to do a follow up just on one thing you had said on NFT's are these non-fungible tokens, which are we've now seen in the digital art world or in the commodification of means, what more can you tell us about those and where they may be headed?
Scott Lucyk 14:04
So NFT's just so everyone understands what that is, it's kind of a scary acronym. But what an NFT stands for is non-fungible tokens. It's a unique signature of ownership of a digital asset. The first kind of NFT was actually was something that people may be familiar with called crypto-kitties, which was actually the product of a Vancouver based company where it is essentially it's a it's a digital collectible in that case. I think that you know, NFT's are a perfect example of how there's kind of that parallel development in the in the cryptocurrency world. So you know, we've gone from crypto-kitties in 2017, to probably the most famous NFT ever, which is a an artist named Beeple, and he sold one of his NFT's digital art for $69 million USD this year, which was a compilation of 5000 different pieces that he developed over a certain number of days. But anyways, all to show you that, you know, when there's these things are selling for $69 million US, people really start to pay attention. We're also starting to see in the NFT space, things like people are turning tweets into NFT's I think Jack Dorsey, the founder of Twitter and his first tweet, I believe, you know, sold for several million dollars. We're also seeing that in the collectible sports collectible and card space as well. So again, we're seeing, you know, a small iteration of cryptocurrency started starting to eat, eat the world, as they say about software.
Alixandra Stoicheff 15:42
Well and Scott, this has been so interesting. And I know that just chatting with you they a lot of your knowledge on this started as a personal interest you were really interested in cryptocurrency and its emergence, but you have increasingly been doing legal work involving cryptocurrencies and blockchain. And so I just wondered if you could briefly touch upon what you see as some of the key legal issues that are arising from this.
Scott Lucyk 18:32
We are certainly starting to see, you know, and it's perhaps not surprising, given how mainstream and high value this industry is becoming that, you know, we are increasingly seeing clients needing assistance. So for example, some of the cases that we've typically seen and have advised on so one area is miners. Miners are people who are actually providing the basic servers, infrastructure to run these decentralized networks. And which obviously can be very lucrative but also very capital intensive and energy intensive endeavors. But, you know, in Canada in some ways, we actually are very well placed to, to host crypto mining facilities, because, particularly in BC and Quebec are two kind of noted provinces, where there's often an excess of hydro electrically generated power. So you know, there is some kind of product market fit as it were for miners to set up in Canada. So that's kind of one area. Another area that we've been active in is assisting businesses and high net worth individuals, typically, who have invested in cryptocurrency and have either a claim against a cryptocurrency exchange if there was if there's any issues and with respect to the exchange, or potentially even recovering cryptocurrencies in certain situations. The other area that we're also seeing more activity in is, you know, companies that are either promoting or establishing cryptocurrency or blockchain based businesses, oftentimes, that's in private equity. But more and more we are seeing companies that are on either the junior exchanges or in some cases, the senior stock exchanges, and we are advising them on crypto related issues.
Mark Fancourt-Smith 18:03
Well, Scott, given the number of interesting avenues that blockchain technology and cryptocurrency is expanding into and given increased regulatory activity. We're gonna have to have you back on before too long to find out where, where we're at as this seems to be changing incredibly quickly. And so until then, thanks so much for being on the podcast.
Scott Lucyk 18:24
Thanks. It was a pleasure.
Alixandra Stoicheff 18:25
Yeah. Thanks so much, Scott.
Mark Fancourt-Smith 18:27
Thank you for joining us on LawsonInsight and thanks again to Scott for joining us today.
Alixandra Stoicheff 18:31
And you can check out Scott Lucyk’s blog posts at lawsonlundell.com and you can also stay up to date by connecting with us on social media using the handle @lawsonlundell, and by subscribing to the podcast on Apple, Spotify or Google podcasts. Thanks so much for listening.