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Report On Business Canadian cryptocurrency advocates push for more leniency on initial coin offerings

Pat Chaukos, Chief of Ontario Securities Commission’s LaunchPad. The OSC says the regulator is keen on supporting cryptocurrency innovation, but must balance that with the need to protect investors from high-risk or fraudulent activities.

Glenn Lowson/The Globe and Mail

Canadian cryptocurrency proponents are pushing for more lenient policies toward initial coin offerings, arguing that Canada risks losing innovation and talent to other jurisdictions under the current rules.

In an open letter to Canada's securities regulators, Toronto-based blockchain advocate William Mougayar argues that "regulatory obscurity" is preventing Canadian companies from participating in the massive wave of wealth creation being spurred by initial coin offerings, or ICOs. The emerging form of fundraising, in some cases similar to crowdfunding, allows companies to raise capital for new ventures by selling digital "tokens" or "coins," that allow investors to participate in the venture.

A separate, private letter sent by a dozen blockchain advocates to the country's finance ministers urged them to compel regulators to take a more open-minded approach to ICOs. The letter, dated Aug. 28, was signed by the Blockchain Association of Canada on behalf of 11 individuals, including Ethereum co-founder Anthony Di Iorio. The Department of Finance said on Friday it has received the letter and will be responding to it directly. Representatives for Ontario Finance Minister Charles Sousa were unavailable for comment.

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ICOs have attracted the scrutiny of regulators worldwide after a number of early stage companies were able to raise tens of millions of dollars in minutes.

By the end of July, 102 projects had raised about $1.3-billion (U.S.) through ICOs, according to research firm Smith and Crown.

In August, the Canadian Securities Administrators (CSA) issued a staff notice that said it will determine on a case-by-case basis, using a four-prong test, whether a particular coin offering is subject to securities laws or not.

The Ontario Securities Commission says the CSA notice is consistent with the approach taken by regulators in other countries such as Australia, Britain, the United States and Singapore. OSC spokeswoman Kristen Rose said in an e-mail that the regulator is keen on supporting cryptocurrency innovation, but must balance that with the need to protect investors from high-risk or fraudulent activities.

"We aim to be flexible in our approach, and believe it's important to work together with businesses and investors to find the right balance for those vested in this space," Ms. Rose said in a statement.

However, some blockchain-industry insiders argue that the CSA staff notice is not clear enough and burdens startups with the task of deciphering whether securities laws apply to their token offering.

"Whereas the Australian notice is very specific about what kinds of tokens would be considered securities, the CSA notice provides none of that clarity, and instead imposes the requirement to do all kinds of analysis and expend resources in consideration of whether their token meets an investment contract test," Equibit Group chief executive Chris Horlacher says. The Toronto-based startup has built a soon-to-be-launched decentralized securities platform.

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Mr. Mougayar, the blockchain advocate, said Canadian regulators are being "very conservative" in their approach and are running counter to the federal government's stated objective of making Canada an innovation hub.

"We're falling behind to the point it's starting to hurt the Canadian tech ecosystem," said Mr. Mougayar, whose online petition had garnered more than 140 signatures as of Thursday afternoon.

The regulations have already prompted one Canadian-based startup to look beyond Canada's borders for capital. Tech startup Kik Interactive Inc., based in Waterloo, Ont., chose to exclude Canadian residents from its recent token sale, which raised nearly $100-million. The company said in a statement last month that Canadian regulators had failed to provide clear direction on when Canadian securities laws apply. The OSC said at the time that it had been in talks with Kik and had told the company its offering constitutes a security and would require an exemption.

However, not all startups have opposed the regulations. Quebec-based Impak Finance, a platform for investing in socially responsible enterprises, launched its token sale last month after getting the green light from Canada's securities regulators. Paul Allard, the company's president and chief ecosystem officer, said Impak faced some criticism from the cryptocurrency community for going the regulated route.

"When we were deciding whether or not Impak Coin would attempt to be regulated, we consulted with cryptocurrency experts," Mr. Allard said in an e-mail.

"They told us that by working with regulators to develop investor-protection measures, we would create a massive amount of extra work for ourselves and miss the opportunity to profit from the massive cryptocurrency market bubble. That sealed the decision for us to do it the hard way. We are building an ecosystem in the real economy, creating real demand for real value, and a bubble, by definition, creates artificial demand, which is unsustainable."

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