The Ontario Securities Commission offers clarity on Blockchain based securities

The Ontario Securities Commission (OSC) announced on Wednesday that Canadian businesses using blockchain technology in their financial products or service offerings may be subject to Ontario securities law requirements.

The announcement states the many uses of distributed ledger technologies (DLT), such as blockchain, have the potential to increase transparency and efficiencies in our capital markets. “We are keen to support this type of innovation," said Pat Chaukos, Chief of the OSC LaunchPad.

OSC LaunchPad is the first dedicated team overseen by a securities regulator in Canada to provide direct support to eligible fintech businesses in navigating regulatory requirements.

"We welcome the opportunity to work with these businesses and help them understand and navigate potential regulatory requirements," Chaukos states in the announcement.

"Because this is a novel area, businesses may not be aware that some uses of this technology could trigger securities law requirements. We encourage these businesses to speak with us about securities law and investor protection requirements that may apply."
— – Pat Chaukos, Chief of the OSC LaunchPad

The OSC highlights that blockchains can be used to facilitate issuances of equity and debt securities and to track their ownership, “Products or other assets that are tracked and traded as part of a distributed ledger may be securities, even if they do not represent shares of a company or ownership of an entity.”

The regulator provides specific examples of blockchain use that may fall into their jurisdiction. “Businesses may also, for example, facilitate initial coin or token offerings where ownership of the coins or tokens is tracked using DLT, or may establish investment funds with DLT-based virtual currencies in their portfolios.”

The OSC cautions any business that is operating or planning to operate a DLT-based venture to consider the different types of offerings that involve securities within the meaning of the Ontario Securities Act. The regulator highlights how the Act broadly qualifies a security, “evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company.”

“If a person or company is offering securities to the public in Ontario, they must file a prospectus or rely on an exemption from the prospectus requirement.”
— – Ontario Securities Commission

Ontario is Canada’s largest province by population, and Toronto is the country’s largest city, ranking 11th globally among financial centers. The OSC is an independent Crown corporation accountable to the Ontario Minister of Finance. It is responsible for regulating the capital markets in Ontario, such as public companies, investment funds, and marketplaces such as the Toronto Stock Exchange in Ontario under the Securities Act, the Commodity Futures Act, and the Business Corporations Act. Its mandate is to protect investors and to foster fair capital markets and confidence in the capital markets.

The OSC is well aware of the various use cases that blockchain technology. The regulator hosted a hackathon called RegHackTO in November. A whitepaper was subsequently released, noting that the majority of solutions presented by participants featured the use of blockchain technology in some way.

"The hackathon made it clear that this technology is powerful," the whitepaper reads. The technology has the potential to, "increase efficiencies and transparencies in our capital markets, within and beyond the securities sector.” The hackathon applications demonstrated smart contracts that protect investors from fraudulent activities, client identify authentication, ledgers that prove securities ownership and increased regulatory monitoring through enhanced oversight capabilities.

“Many of the DLT and open data solutions presented by the teams are relevant not only to the securities sector, but also to the broader financial services industry, including banking, payments and insurance. Governments and regulators need to work together to respond appropriately to new business models that challenge traditional ways of delivering products and services, and cross jurisdictional lines.”

• Ontario Securities Commission

In other parts of the world, regulators have been providing regulatory sandboxes for financial technology, such as blockchain. The trend started in the UK last February last year when launched the first Blockchain tech sandbox.

“The Sandbox will allow businesses to test out new, innovative financial services without incurring all the normal regulatory consequences of engaging in those activities. It is safe to say that we have been inundated with interest about the sandbox,” stated the Financial Conduct Authority Director of Strategy, Christopher Woolard.

Singapore’s Central Bank introduced a similar environment in August, launching a regulatory sandbox to allow local fintech companies to experiment with their solutions. In November, the Thai Central Bank started a major fintech promotion, launching a sandbox that included Blockchain tech startups. While designed for banks, non-bank technology firms with “sufficient capital and human resources” were invited too.

Big-four professional services firm KPMG released a report attributing many Asian investments in blockchain fintech to this global trend of regualtory sandboxes. The firm pointed out that the governments in Hong Kong, Australia, Indonesia, and Malaysia all created or announced sandboxes for the banking sector during the third quarter of 2016. The firm described the push as part of a greater, worldwide embrace of fintech in general by governments and other monetary authorities.