Decrypting cryptocurrency

Insider: Geoffrey Cher

Lawyer Geoffrey Cher: “At the end of the day, the principles that will come to be applied in this rapidly emerging ecosystem will be the same principles that we’ve had for 40 or 50 years from a securities law perspective”

Who Geoffrey Cher, partner, Wildeboer Dellelce, a corporate, commercial and securities law specialist with a focus on the digital economy.

Involvement Cher is a regular adviser and speaker on fintech, distributed ledger technologies and cryptocurrencies. In November, he emceed the 2017 Canadian Fintech and AI Awards Gala and also headed up a blockchain and cryptocurrency symposium in Toronto that was indicative of the frenzy of recent interest in these topics. Initially planned as an event for 50 to 80 clients, it wound up drawing more than 200.

Listed Recently, the Ontario Securities Commission’s Jeff Kehoe called out the Bank of Canada for having its “head in the sand” on Bitcoin. At the same time, we’ve got things like the OSC’s LaunchPad, the Canadian Securities Administrators’ Digital Sandbox and some initial CSA regulatory guidance. Where are we at?

Geoffrey Cher We’re in the first inning. There’s a securities law framework for the regulation of issuers and sponsors of these digital assets and that’s where the CSA guidance regarding the regulation of cryptocurrencies came from. At the end of the day, the principles that will come to be applied in this rapidly emerging ecosystem will be the same principles that we’ve had for 40 or 50 years from a securities law perspective in terms of trying to measure what the asset is—i.e., is it an investment contract, is it a security—and then in having to find the necessary accommodation to allow market participants to take advantage of whatever the perceived opportunity is. The CSA is trying to provide guidance in broad strokes. And they are welcoming people to come in and have a conversation with them. The [LaunchPad/Sandbox] essentially gives you a limited time, or limited term licence, to proceed with your business plan and try to provide a use case within a two-year time frame.

Listed The Bank of Canada says digital currencies are commodities?

Geoffrey Cher The Bank of Canada side of things is fundamentally different, because for the Bank to accept a digital currency as a currency raises significant issues around the control of monetary policy and, of course, you can’t have Bitcoin supplant the Canadian dollar.

Listed At the individual company level, ICOs (initial coin offerings) are suddenly the big thing. What are they, exactly?

Geoffrey Cher In terms of capital raising, it’s essentially crowdfunding using a digital asset. People don’t call it that because it’s not as appealing as this concept of an ICO—or what they call a TGE, a token generating event—but at the end of the day, it’s a crowdfunded exercise that’s issuing a digital asset. And I use the term asset loosely. Because what you really receive [as an investor] is an evidence of a number of smart con- tracts or tokens in a digital wallet that you have in your phone. And that’s it. You have no recourse to the issuer of that unit, you generally have no legal standing in terms of actually being able to go to the bank and say, ‘Hey, I own 10 units of X, can I get a mortgage?’ People tend not to focus on those details as much as the rampant speculation in the marketplace.

Listed To what extent are Canadian regulators keeping up?

Geoffrey Cher The consensus is forming quickly. From a securities regulatory perspective they’ve said, look: a) we’re going to take an expansive approach; b) be principles based, and c) they’ve said to people, if you’re coming to raise money, using for example an ICO process, that’s great. And if you say it’s a token [for use as a currency on your company’s platform], that’s great. But if you’re taking that token and listing it on a foreign exchange, and trading that token, well, then it’s not a token, it’s a security.

There’s been three [recent] decisions in Canada, we’re actually further along than many jurisdictions. In British Columbia, this summer, they authorized the first investment fund manager to raise capital in the exempt market for a Bitcoin trust. In Quebec, the AMF has allowed a company in Montreal to conduct its first ICO, using a closed system to raise money to invest in social finance initiatives. In Ontario, they have also allowed a crowdfunding platform, in essence, to not only raise money using its own ICO, but also to build a platform for companies to use as a kind of a one-stop shop [for their own digital crowdfunding]. So we’ve got three meaningful touch points where we understand what the thinking is, what the model is likely to be, and what the terms and conditions are.

Listed What about Canadian companies that see ICOs as a way to raise big money by offering tokens that can be traded externally?

Geoffrey Cher Companies that come to our office—almost daily—who say, ‘I want to conduct an ICO and raise $100 million,’ quickly realize that the only way they can do it is by following in the footsteps of the other companies that have done that by putting themselves, or at least undertaking the activity, in a jurisdiction that’s viewed as a somewhat lighter touch regulatorily and then limiting their interaction with the investor base at home. This was the example that Kik Interactive Inc. followed when they issued their digital token called Kin.

Interview by Listed Staff.

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