Fintech Regulatory Developments: 2022 Year In Review – Fin Tech

As anticipated in our 2021 year in review, there were significant
and notable developments in the Canadian Fintech industry in
2022.

The following is a summary of some of the key Fintech developments in 2022, as well as some regulatory developments on which to keep a watchful eye in 2023, including the emergence of innovative solutions and the contributions made by fintech development company.

WHAT WE SAW IN 2022

1. 1. PAYMENTS DEVELOPMENTS

• • As part of the Bank of Canada’s new authority to supervise
    retail payment activities under the Retail Payments Activities
    Act (“RPAA“), the Bank of Canada
    recently released its Retail Payments Supervisory Framework, which
    provides insight into how the Bank of Canada will supervise payment
    service providers (“PSPs“) in relation
    to operational and financial risks. The framework states that a PSP
    portal will be developed to facilitate the application and
    registration for PSPs. The framework also indicates several tools
    available to the Bank of Canada to enforce compliance under the
    RPAA, including: compliance agreements, notices of violation,
    compliance orders and the ability to apply to Superior Court to
    request a compliance-related order.

• • In March 2022, the federal government appointed Abraham
    Tachjian as open banking lead. His mandate is to develop an open
    banking regime based on the recommendations in the final report of the Advisory Committee on Open
    Banking, (the “Final Open Banking
    Report“) including designing key pillars of the open
    banking system such as common rules and an accreditation framework
    for open banking participants.

• • Four open banking working groups (Accreditation, Liability,
    Privacy and Security) have been established, each of which includes
    balanced representations from banks, other open banking
    participants and consumer representatives. Each working group has
    met five times of the course of 2022 to progress Canada’s open
    banking implementation, with a summary of discussion items and the
    outcomes of each meeting being posted. In relation to accreditation, it
    appears that federally and provincially regulated financial
    institutions will be exempt, while others that directly access a
    data holder’s API or those that collect consumer-permissioned
    data (possibly with the exception of third party technical service
    providers and outsourcing service providers to system participants)
    will be subject to accreditation. The concept of an accredited
    participant being able to provide sponsored or agency like system
    access to a third party seems to be accepted, although more
    stringent accreditation requirements relating to risk management
    and financial capacity are expected for those that sponsor or have
    agents. Further, those that are registered provincially as a
    securities dealer or registered as a payment service provider under
    the RPAA may be subject to streamlined accreditation process. In
    relation to certification, it appears that all system participants
    (even those that are not subject to accreditation) will be subject
    to certification; however, it is not yet clear whether the
    certification process should be uniform for all participants or
    should vary depending on the role of the participant, its size, its
    role and type of services provided. In relation to liability,
    little consensus has been reached to date on the legal relationship
    between participants, how obligations between participants should
    be addressed and whether open banking end users should have a right
    of enforcement against participants – so the upcoming year
    should be informative.

• • Payments Canada completed a number of milestones this year in
    keeping with its payments modernization initiative as detailed in
    its 2022 to 2026 Corporate Plan. It deployed new
    code to Lynx, the high-value payment system which in 2021 replaced
    the Large Value Transfer System (LVTS), to enable the introduction
    of the ISO 20022 financial messaging standard. Once this code is
    released in March 2023, Lynx will be compatible with global risk
    and operations standards that ensure operability. Payments Canada
    also announced that, as of November 14, 2022, direct clearers can
    now access the automated clearing settlement systems (ACSS) outside
    of Canada provided that they meet certain requirements. Payments Canada’s
    anticipated Real-Time Rail (“RTR“)
    payment system work moved forward this year, however the launch has
    been delayed and a revised timeline has not been released.

• • Payments Canada also modernized its rule in
    respect of Pre-Authorized Debit (“PAD”) agreements by
    amending its ACSS Rule H1. The amended rule introduces in new
    concepts, such as the One-Time PAD that automatically terminates
    once payment is complete, as well as new disclosure requirements
    for any arrangement between a payee and a third party entity
    providing goods or services to a payor. The distinction between
    electronic and paper PAD agreements was removed, and the
    definitions in the rule of “authorization” and
    “commercially reasonable methods” were updated to reflect
    contextually-appropriate identity verification methods.

• • The federal government also announced in the Budget and the
    Fall Economic Statement that it intended to “enter into
    negotiations” with payment card networks, financial
    institutions, acquirers, payment processors and businesses to lower
    credit card transaction fees for small businesses while seeking to
    protect “existing reward points for consumers”. In
    addition, the federal government proposed legislative
    amendments to the Payment Card Networks Act.
    If the amendments come into effect, which is only expected to be
    the case if the government and payment card industry do not reach
    an agreed solution, they would grant the Financial Consumer Agency
    of Canada the power to regulate how fees are determined and
    disclosed, as well as the notice requirements for changes in
    fees.

• • Visa and Mastercard amended their rules effective October 6,
    2022 to permit Canadian merchants to surcharge customers
    interchange or swipe fees when using their credit card.

2. 2. ANTI-MONEY LAUNDERING REGULATORY DEVELOPMENTS

• • On April 5, 2022, amendments to the regulations under the
    Proceeds of Crime (Money Laundering) and Terrorist Financing
    Act (“PCMLTFA“) came into force
    that, among other things, expanded the scope of the PCMLTFA to
    capture crowdfunding platforms and certain payment service
    providers (“PSPs“) and amended the
    definition of electronic funds transfers. The amendments were
    introduced following developments under the Emergencies
    Act and the Emergency Economic Measures Order earlier
    this year, whereby the scope of entities subject to the PCMLTFA as
    money services businesses (“MSBs“) and
    foreign money services businesses
    (“FMSBs“) was temporarily expanded to
    include crowdfunding platforms and certain PSPs. In July 2022, the
    Financial Transactions and Reports Analysis Centre of Canada
    (“FINTRAC“) issued a notice to further clarify which PSPs are
    subject to the PCMLTFA and must register as MSBs or FMSBs. FINTRAC
    is now taking the position that persons or entities that provide
    invoice payment services or payment services for goods and
    servicesare engaged in the business of remitting or transmitting
    funds for purposes of the PCMLTFA.

• • In June 2022, the British Columbia government officially
    released the final report examining the scope of money
    laundering in B.C., authored by Austin Cullen (the
    “Cullen Report“). At the forefront of
    the Cullen Commission’s mandate was spearheading a
    comprehensive review of the growth of money laundering in the
    province and formulating recommendations and guidance as to how
    B.C. could counter this longstanding issue. Mr. Cullen drafted the
    Cullen Report based on his evidentiary observations stemming from
    nearly 200 witnesses and approximately 1,000 exhibits over the
    course of 133 days of public hearings. The Cullen Report sets out
    101 recommendations for B.C. and how the province can mitigate
    money laundering across sectors, including potentially introducing
    provincial MSB regulation in the province of British Columbia.

3. 3. CRYPTOCURRENCY AND DIGITAL ASSET REGULATORY DEVELOPMENTS

• • Capital Markets Developments
    • • During 2022, the Canadian Securities Administrators
        (“CSA“), the umbrella organization of
        Canada’s provincial and territorial securities regulators,
        registered six crypto asset trading platforms
        (“CTPs“) as securities dealers in
        Canada, bringing the total number of firms registered under the CSA’s emerging
        regulatory framework for CTPs to ten, including eight
        restricted dealers and two investment dealers that are also members
        of the Investment Industry Regulatory Organization of Canada
        (“IIROC“).
    • • Three registered CTPs are also regulated as marketplaces for
        securities in Canada, with Bitbuy Technologies Inc. and Simply Digital Technologies Inc. operating
        under exemptions from marketplace recognition and Coinsquare Capital Markets Ltd. operating a
        recognized alternative trading system
        (“ATS“) for crypto assets.
    • • All ten registered CTPs have agreed to terms and conditions
        (“T&Cs“) of registration which are
        intended to reduce investor protection risks associated with CTP
        operations by imposing detailed obligations relating to crypto
        asset custody, insurance, risk disclosure, product due diligence
        and, in certain provinces, investment limits on the Canadian dollar value
        that retail investors may invest in crypto assets other than
        bitcoin, Ether, Litecoin and Bitcoin Cash.
    • • On August 15, the CSA announced a new requirement for CTPs that are working
        toward registration under securities laws to provide a publicly
        available undertaking (a “Pre-Registration
        Undertaking” or “PRU“) in
        order to continue to provide services in Canada while pursuing
        registration. These undertakings are intended to provide clarity to
        Canadian users regarding the regulatory status of various CTPs, and
        address level playing field concerns raised by registered CTPs
        regarding their unregulated competitors. Thus far, the two PRUs
        which have been published suggest that all CTPs pursuing
        registration will accept T&Cs very similar to those which have
        been adopted by registered CTPs.
    • • On November 22, the Ontario Securities Commission
        (“OSC“) published its 2023-24 Statement of Priorities, which
        includes strengthened oversight and enforcement in the crypto asset
        sector. The OSC signalled that it will continue to register CTPs as
        dealers, work with IIROC to facilitate restricted dealer CTPs to
        transition to IIROC, develop a regulatory framework for how
        investment funds invest in crypto assets and explore the regulatory
        implications of stablecoins in the capital markets, among other
        crypto-related priorities.
    • • On December 1, the OSC’s Corporate Finance Branch published
        its 2022 Annual Report, which set out its
        expectations for public disclosure to be provided by reporting
        issuers (e.g. public companies) that operate in the crypto asset
        sector (“crypto asset reporting
        issuers“), given that the regulatory environment
        differs across jurisdictions and may be evolving or lack certainty.
        A crypto asset reporting issuer is required to disclose details of
        is operations in every jurisdiction where it carries on business,
        as well as a description of the applicable regulatory regime and
        steps taken to comply with applicable regulation, including whether
        legal advice has been obtained. The OSC also identified certain
        types of events or information that may be material to crypto asset
        reporting issuers, including a collapse in the price of a crypto
        asset to which an issuer has material exposure, the entering into
        by an issuer of an arrangement for borrowing, lending or
        encumbering the issuer’s crypto assets, including details of
        the counterparty, and relevant regulatory announcements or actions,
        such as a regulatory action taken against another issuer with a
        similar business. This guidance will be relevant to the numerous
        crypto asset reporting issuers listed on Canadian stock exchanges,
        which numbered 49 as of March 11, 2021, the time of publication of
        CSA Staff Notice 51-363 Observations on Disclosure
        by Crypto Assets Reporting Issuers.
    • • On December 12, the CSA announced that it is strengthening its oversight
        of CTPs by imposing a deadline for all CTPs offering services
        in Canada to provide a Pre-Registration Undertaking, cease
        operating in Canada or face enforcement action. In addition, the
        CSA announced an expansion of the terms and conditions which will
        apply under the PRU, including requirements to hold client assets
        with an “appropriate” custodian, segregated from
        proprietary assets, and prohibitions against offering margin or
        leverage to any client. These requirements may be more stringent
        than existing T&Cs and PRUs, which allowed CTPs to hold client
        crypto assets representing up to 20% of the total value of client
        crypto assets outside of the custodial account and offer
        “margin, credit or other forms of leverage” to clients
        that qualify as “permitted clients” under securities
        laws.
    • • On December 12, the CSA publicly announced for the first time
        its view that “stablecoins, or stablecoin arrangements, may
        constitute securities or derivatives“. Many registered
        CTPs offer Canadian clients the ability to trade in stablecoins.
        Registered CTPs, as well as CTPs that provide PRUs, are already
        prohibited from offering Canadian clients the ability to trade in
        or obtain exposure to crypto assets that are themselves securities
        or derivatives and are required to have policies and procedures in
        place to make this determination.

• • Capital Markets Enforcement
    • • In 2022, the OSC was the most active Canadian securities
        regulatory authority in bringing enforcement actions against
        participants in the crypto asset industry.
    • • On March 17, Binance Holdings Limited and Binance Capital
        Markets Inc. (together, “Binance“) gave
        an undertaking to the OSC that effectively
        prohibits Binance from offering any services in Ontario (the
        “Binance Undertaking“). The Binance
        Undertaking holds Binance accountable for taking steps to address
        concerns arising from events beginning in December 2021 when
        Binance falsely notified investors that it was allowed to continue
        operations in Ontario after previously announcing its withdrawal
        from Ontario in May 2021. Then, in January 2022, Binance confirmed
        to OSC Staff that trading restrictions were in place for Ontario
        accounts on the Binance platform when in fact Ontario accounts were
        able to trade. The Binance Undertaking required Binance to adopt
        procedures for preventing Ontarians from opening new accounts,
        restricting existing Ontario accounts to “liquidation
        only”, reimbursing withdrawal fees charged to Ontario clients,
        retaining a third party compliance consultant and reporting to the
        OSC. The Binance Undertaking also acknowledged the OSC’s
        reservation of its rights to bring enforcement proceedings against
        Binance for other misconduct.
    • • In June and October, the OSC made orders against four
        foreign-domiciled CTPs that offered high risk investment products
        to retail investors in Ontario, such as margin accounts and
        perpetual futures contracts which provided up to 100x leveraged
        exposure to underlying crypto assets: KuCoin and ByBit in June, and Poloniex and OKX in October. All four orders imposed
        significant monetary penalties on the CTPs relating to their past
        conduct, but the severity of market restrictions varied
        significantly based on the extent to which the platform cooperated
        with the OSC in its investigation.
    • • KuCoin and Poloniex did not participate in the proceedings,
        resulting in adverse inferences by the Tribunal. The platforms were
        subject to administrative penalties and disgorgement orders in the
        range of US$2 million to US3.5 million, costs of the investigation
        and the hearing, and permanent bans from the Ontario capital
        markets. In contrast, ByBit and OKX cooperated with the OSC’s
        investigation and negotiated settlements with the OSC. Each
        platform agreed to disgorge revenues generated from Ontario
        accounts and pay costs of the proceeding. Each platform also gave
        an undertaking to wind down most of its existing Ontario business
        and bring its operations into compliance by pursuing registration
        under Ontario securities laws. If at any time during registration
        discussions, the OSC communicates to the CTP that it will not be
        feasible for it to operate in a manner that is compliant with
        Ontario securities laws, the CTP agrees that it will completely
        wind down its Ontario operations.
    • • On September 30, the OSC filed a Statement of Allegations against an Ontario
        resident, Troy Richard James Hogg
        (“Hogg“) and his affiliated companies in
        relation to a US$51 million fundraise for “a fraudulent
        offering of crypto security tokens” to investors around the
        world. The OSC alleges that while raising funds, Hogg and his
        companies defrauded investors by using false or misleading
        statements in promotional materials, and diverted investor funds to
        purchase assets for the benefit of Hogg and other companies
        controlled by Hogg. The OSC thanked the U.S. Securities and
        Exchange Commission (“SEC“) for its
        assistance with the investigation, and explained that the SEC had
        conducted a parallel investigation and had filed charges in the
        U.S. District Court Southern District of Florida against Hogg and
        several U.S. residents.
    • • The OSC’s 2023-24 Statement of Priorities confirms that
        it will continue to bring enforcement actions against crypto asset
        market participants to address non-compliance with securities laws,
        and that it will continue to add crypto firms to investor warning
        lists. The OSC’s planned outcomes include “increas[ing]
        public awareness of these complex products, platforms and potential
        frauds/scams”, and “achiev[ing] an appropriate balance in
        supporting novel businesses and fostering innovation and
        competitive capital markets while promoting investor
        protection”.

• • Federal Digitalization of Money
    Consultations
    • • In November 2022, Deputy Prime Minister and Finance Minister
        Chrystia Freeland delivered the fall economic statement, which
        included an outline of the federal government’s plans to understand
        digital currencies and their effect on the Canadian financial
        system. This includes targeted consultations with stakeholders on
        digital currencies, including cryptocurrencies, stablecoins and
        central bank digital currencies
        (“CBDCs“). These consultations will form
        part of the government’s intention to set in motion a financial
        sector legislative review targeting the digitalization of money and
        maintaining stability and security in the country’s financial
        system, previously announced as part of the 2022 budget in
        April.

• • Office of the Superintendent of Financial
    Institutions (OSFI) Developments
    • • On November 16, 2022, OSFI, the Financial Consumer Agency of
        Canada (FCAC) and the Canada Deposit Insurance Corporation (CDIC)
        issued a joint statement to all regulated entities
        engaging in crypto asset activities or crypto-related
        services.
    • • Alongside the statement, OSFI published a Roadmap for an Evolving Digital Asset
        Landscape and invited feedback from both regulated and
        non-regulated entities. The roadmap includes the launch of a
        regulatory sandbox in the first half of 2023 to enable
        experimentation of new technologies in a safe environment.
    • • Earlier in the year, OSFI issued an advisory setting out its interim approach for
        cryptoassets held by federally regulated financial institutions
        (“FRFIs“). This advisory outlines
        OSFI’s expectations with respect to prudential treatment of
        cryptoasset exposures, guided by the view that FRFIs should apply
        conservative treatment and set prudent limits in relation to such
        exposures. The advisory also provides further guidance on how FRFIs
        should approach the capital and liquidity treatment of cryptoasset
        holdings.

4. 4. LENDING REGULATION

• • In August 2022, the Department of Finance Canada published a consultation paper to solicit feedback from
    stakeholders, various industry associations, consumer groups, and
    members of the public relating to the maximum rate of interest
    under the Criminal Code and the provision of high-cost
    installment loans in Canada. While the federal government has not
    yet proposed a new criminal interest rate, the purpose of the
    consultation was to better understand the impact a rate reduction
    may have on the availability of credit to Canadians.

• • British Columbia’s high-cost lender regime came into force
    on May 1, 2022, making it the fourth province after Alberta,
    Manitoba and Quebec to regulate high-cost lenders. The high-cost
    lending regime will apply where the interest rate charged exceeds
    32%. Lenders offering such products will need to be licensed and
    certain disclosure requirements and cancellation rights will apply,
    including a one day cooling-off period.

5. 5. INSURTECH

• • As anticipated in our 2021 year in review, the Innovation
    Office of the Financial Services Regulatory Authority of Ontario
    (“FSRA“), the regulator of insurance
    companies, credit unions, caisse populaires and loan and trust
    companies in the province of Ontario, released its Final Innovation Framework on January 24, 2022
    following public consultation in 2021. The Innovation Framework
    describes how the FSRA will identify, manage, and deliver
    opportunities to enable innovation in regulated sectors. The FSRA
    also concurrently released the first “test and learn
    environment” (“TLE“) on January 24,
    2022, available for use by the automobile insurance sector. TLEs
    are a set of virtual environments that allow interested market
    participants to test out their innovative products, services, and
    business models using data-driven and evidence-based
    approaches.

WHAT TO WATCH FOR IN 2023 (AND BEYOND)

• • We anticipate the draft RPAA regulations to be issued for
    public comment in 2023. The Bank of Canada has announced it is
    aiming to prioritize PSP registration in 2024 followed by
    compliance with requirements for operational risk management and
    safeguarding end-user funds in 2025.

• • We also expect progress to continue with respect to Payments
    Canada’s anticipated RTR in 2023, although the go live date has
    not yet been announced. Payments Canada will also be looking into
    ongoing modernization of the retail batch payments system in 2023
    and beyond.

• • The Implementation phase of the Open Banking Implementation
    Plan is expected to begin in 2023, with the Open Banking Lead
    overseeing testing of an open banking system and the government
    starting to formulate elements of an open banking framework,
    according to the Final Open Banking Report. The Final Open Banking
    Report initially contemplated a live date of January 2023 for open
    banking but progress has not kept pace with this ambitious
    schedule.

• • In terms of cryptocurrency-related regulation, OSFI will be a
    regulator to watch in 2023. Over the next 24 months, OSFI has multiple projects planned to provide
    additional clarity on areas of risk management and governance
    pertaining to digital assets. OSFI’s roadmap also includes a 2023 consultation on
    risk management expectations for digital currencies, including
    stablecoins. We also expect the digitalization of money
    consultations with stakeholders on digital currencies, including
    cryptocurrencies, stablecoins, and central bank digital currencies
    to continue into 2023. While they currently “do not have plans to issue a digital
    currency“, we will also monitor the Bank of Canada’s
    evolving position on building a digital version of the Canadian
    dollar, a CBDC.

• • Given the collaboration evident in the OSC and SEC’s investigation and allegations against Hogg and
    related companies, coupled with the global nature of digital
    assets, we expect to see greater cooperation among Canadian
    regulators, with both domestic and foreign agencies.

• • As outlined in their announcement on December 12, 2022, CSA members
    will contact registered crypto trading platforms individually to
    discuss the application of the expanded terms and conditions to
    those firms. The CSA will publish further details about this
    updated approach in the future.

• • As outlined in the FSRA’s proposed statement of priorities for
    2023-2024, the FSRA Innovation Office will leverage the data
    and knowledge gained from the pilot TLE in 2022 to expand the scope
    of its TLE model by including more initiatives across regulated
    sectors in the upcoming years.