Fintech Regulatory Developments: 2023 Year in Review
The year 2023 was a landmark year for Fintech regulation in Canada, with a number of significant developments (including long-awaited ones like the finalization of the Retail Payment Activities Act (the “RPAA”) regulations). We have summarized the key Canadian Fintech regulatory updates of the past year, and give a preview of regulatory developments to keep an eye on in 2024 and beyond.
WHAT WE SAW IN 2023
- Finalization of RPAA Regulations - The final Retail Payment Activities Regulations in respect of the Retail Payment Activities Act (the “RPAA”) were issued in November 2023, setting forth the requirements that will apply to payment service providers (“PSPs”) in Canada. As a reminder, subject to certain prescribed exemptions, the RPAA generally applies to PSPs that perform any of the following five payment functions:
- the provision or maintenance of a payment account;
- the holding of end-user funds until withdrawn by the end user or transferred to another individual or entity;
- the initiation of a payment at the request of an end user;
- the authorization or transmission of a payment message; or
- the provision of clearing or settlement services.
The regulations prescribe proposed standards for operational risk management, requirements for safeguarding end-user funds, registration requirements, reporting requirements, penalties for non-compliance and national security safeguards.
The Bank of Canada also issued guidance on criteria for registering payment service providers. Please see the section “What to Watch for in 2024 (and Beyond)” for key dates with respect to PSP registration with the Bank of Canada.
- Update on Open Banking (aka Consumer-Driven Banking) - In the Fall Economic Statement, the federal government announced its intention to introduce legislation establishing an open banking framework in the 2024 federal budget. It also released a Policy Statement on Consumer-Driven Banking providing more guidance on implementing open banking, including five core elements: governance, scope, accreditation, common rules and technical standards. The federal government has set a goal of adopting legislation and fully implementing the necessary governance framework by 2025.
- Designation of Additional Prominent Payment Systems, Including Visa and Mastercard: Effective October 16, 2023, the Bank of Canada designated the following as prominent payment systems under the Payment Clearing and Settlement Act: Visa Inc.’s VisaNet, Mastercard International Inc.’s Global Clearing Management System and Single Message System, and Interac Corp.’s Inter-Member Network. Designation brings these systems under formal oversight of the Bank of Canada and requires them to adhere to the Bank of Canada's risk management standards, including having risk controls in place to ensure continued resilience.
- Interchange Fee Commitments –On December 5, 2023, the Canadian government announced that it had finalized agreements with Visa and Mastercard to lower credit card transaction fees for small businesses. For qualifying small businesses, Visa and Mastercard have agreed in the finalized agreements to: reduce domestic consumer credit interchange fees for in-store transactions to an annual weighted average interchange rate of 0.95%; reduce domestic consumer credit interchange fees for online transactions by 10 basis points, resulting in reductions of up to 7%; and provide free access to online fraud and cybersecurity resources to help small businesses grow their online sales while preventing fraud and chargebacks. Small businesses with an annual Visa sales volume below $300,000 will qualify for the lower interchange fees from Visa, and those with an annual Mastercard sales volume below $175,000 will qualify for the lower fees from Mastercard. Small businesses will need to qualify with each credit card network individually. Non-profit organizations with transaction volumes below these thresholds will also benefit from reduced rates. As part of these new agreements with Visa and Mastercard, Canada’s large banks agreed to protect Canadians’ reward points. The new rates will come into effect in the fall of 2024.
- Amendments to Canadian Payments Act: The federal government announced plans in the 2023 fall economic statements plans to amend the Canadian Payments Act to expand membership eligibility in Payments Canada to: (a) PSPs supervised by the Bank of Canada under the RPAA, (b) credit union locals that are members of a credit union central, and (c) operators of designated clearing houses.
- Payments Modernization: The road to payments modernization continues at Payments Canada, although implementation of the Real-Time Rail (RTR) payment system did not occur in 2023 and has been further delayed.
DIGITAL ASSET REGULATORY DEVELOPMENTS
- Pre-Registration Undertakings Deadline - On February 22, 2023, the Canadian Securities Administrators (“CSA”) set a 30 day deadline for unregistered crypto asset platforms (“CTPs”) operating in Canada and pursuing registration to provide to their principal regulator a stricter pre-registration undertaking (“PRU”), with content prescribed in new CSA Staff Notice 21-332 – Crypto Asset Trading Platforms: Pre-Registration Undertakings: Changes to Enhance Canadian Investor Protection. CTPs that were unable or unwilling to provide the PRU were expected to off-board Canadian users and impose restrictions to prevent Canadian users from accessing the CTP’s products or services.
- Publication of PRUs - Following the 30 day deadline announced by the CSA, the CSA published the PRUs given by ten CTPs on April 12, 2023. CTPs which gave PRUs that were accepted by the CSA by the March 24 deadline include U.S.-based Coinbase, Kraken and Gemini, longstanding Canadian CTPs NDAX and Shakepay, and several other smaller CTPs, four from Canada and two international platforms.
- Restrictions on CTPs that Trade Stablecoins - On October 5, 2023, the CSA publishedCSA Staff Notice 21-333 – Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (SN 21-333), starting the countdown on new restrictions to be imposed on CTPs that trade stablecoins with Canadian clients. SN 21-333 prohibits CTPs from offering stablecoins other than fiat-back crypto assets that reference C$ or US$ on a one-for-one basis and are fully backed by audited reserves that meet prescribed requirements. SN 21-333 requires the issuers of such stablecoins to submit to the jurisdiction of the CSA by April 30, 2024. Because SN 21-333 currently goes beyond most established regulatory frameworks for fiat-backed stablecoins like USDC, GUSD and PYUSD, there is a risk that issuers may refuse to comply, which would force CTPs to de-list such assets.
- Federal Stablecoin Consultations – The Office of the Superintendent of Financial Institutions (“OSFI”) initiated consultations in April 2023 on recommendations regarding stablecoins, with a focus on federally regulated financial institutions (“FRFIs”) and fiat-referenced crypto assets pegged to a fiat currency and backed at least one-for-one by cash and cash equivalents. The recommendations cover aspects of global stablecoin arrangements related to regulatory powers, international cooperation, governance frameworks, risk management, transparency, legal claims, and compliance with jurisdictional requirements. The goal of the consultation was to help inform OSFI’s potential development of risk management expectations and future regulation for FRFIs that engage in crypto asset activities.
- Capital and Liquidity Treatment of Crypto-Asset Exposures – OSFI released a draft guideline July 2023 on the regulatory capital and liquidity treatment of crypto-asset exposures.
- Disclosure Requirements in Respect of Crypto-Asset Exposures - On November 20, 2023, OSFI initiated a consultation on the need for public disclosure of crypto asset exposures by FRFIs in Canada. The federal government also stated in the 2023 fall economic statement that it had been advancing initiatives to require disclosures of crypto-asset exposures by federally regulated pension plans.
- Federal Digitalization of Money Review - No updates were provided in 2023 in respect of this Department of Finance review process which began in 2022.
- Canada Revenue Agency Roundtable - In November 2023, the Canada Revenue Agency (CRA) engaged in a roundtable discussion with the Association de planification fiscale et financière, offering insights on cryptocurrency taxation. The CRA expressed the view that a transfer of bitcoins from a private wallet to a centralized platform would likely be considered a “disposition” for tax purposes. The CRA also affirmed that when a taxpayer loses access to their cryptocurrency due to a centralized exchange platform falling victim to fraud or theft, such losses should be realizable.
ANTI-MONEY LAUNDERING REGULATORY DEVELOPMENTS
- Expansion of Scope to Additional Fintech Businesses - Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) Regulations (the “PCMLTFA Regulations”) introduced this year will expand the application of the PCMLTFA to mortgage lenders, mortgage brokers and mortgage administrators, with the applicable requirements applying as of October 11, 2024. In addition, the 2023 fall economic statement bill proposed expanding scope to require entities that provider acquirer services in relation to private automated banking machine to register as money services businesses to register as money services businesses (“MSBs”).
- Criminalization of Unregistered MSBs – The federal government's announced in the federal budget its intention to criminalize the operation of unregistered MSBs.
- New British Columbia MSB Legislation - On May 11, 2023, the Money Services Businesses Act (the “BC MSB Act”) in British Columbia received royal assent. Once in force, the BC MSB Act will require MSBs to register provincially in the British Columbia with the BC Financial Services Authority (“BCFSA”), in addition to the requirement to register federally with FINTRAC and in Quebec, with Revenu Quebec. The BC MSB Act defines “money services” as (1) foreign exchange dealing, (2) remitting or transmitting funds, (3) issuing or redeeming traveller’s cheques and money orders, and (4) services prescribed by regulation. The definition does not include a reference to dealing in virtual currencies which is currently present in the PCMLTFA.
- New FINTRAC Funding Model - Starting April 1, 2024, the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) is introducing a new funding model where it will charge reporting entities instead of taxpayers for the annual cost of its compliance program. This amount charged will be (i) a fixed base amount based on the value of the reporting entity’s Canadian assets at the end of the financial year plus (ii) the “remaining compliance cost” being the cost of FINTRAC’s compliance program less the sum of all base amounts.
- Consultation on Canada’s AML/ATF Regime - On June 7, 2023, the federal government published a paper seeking public consultation on potential changes to Canada's anti-money laundering and anti-terrorist financing (“AML/ATF”) regime. The consultation paper sought input on a number of areas relevant to Fintechs, including:
- Mandate of AML/ATF Regulator - The scope and mandate of the Canada Financial Crimes Agency (“CFCA”), a new, dedicated lead enforcement agency proposed by the federal government in Budget 2023.
- Scope of AMT/ ATF Regime - The scope and obligations of the AML/ATF framework, including reviewing the application to existing reporting entities and expanding AML/ATF coverage into new sectors, including factoring companies and white label ATMs.
- AML/ ATF Risks Posed by Digital Assets – Risks posed by digital assets, including the application of AML/ATF obligations to this sector, including new financial technologies such as mixers, decentralized finance (DeFi), tokenized assets and non-fungible tokens (NFTs). In particular, the consultation paper asks about (i) risks posed by new financial technologies that are insufficiently covered by the AML/ATF framework, (ii) whether AML/ATF requirements should be extended to Fintechs that are currently not regulated, (iii) whether reporting entities should be prohibited from transferring virtual currencies to and from crypto-mixers/crypto-tumblers that are not registered with FINTRAC, and (iv) how AML/ATF obligations for this sector can be crafted to be technologically neutral, among other questions.
- Criminal Rate of Interest - The federal government put forward in the budget bill amendments to the Criminal Code to lower the criminal rate of interest from the current rate to “an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced”. These changes are not yet in force. In addition, in October, the federal government initiated further consultations on lowering the criminal rate of interest.
In December, the federal government issued proposed Criminal Interest Rate Regulations for consultation, which, among other things, outline certain proposed exemptions to the criminal interest rate limit for commercial loans and set a proposed national limit on interest rate for payday loans.
CONSUMER PROTECTION DEVELOPMENTS
- New Ontario Consumer Protection Legislation - In October 2023, the Ontario government introduced new consumer protection legislation that would replace the Consumer Protection Act, 2002. While the bill did not include changes specifically focused on Fintech entities, it would result in a new consumer protection act in Ontario, with much of the detail to follow in regulations to be issued.
OTHER FEDERAL DEVELOPMENTS
- Financial Sector Legislative Review - The federal Department of Finance initiated legislative review consultations for the review of FRFI statutes, namely the Bank Act, the Insurance Companies Act, and Trust and Loan Companies Act. The consultations seek to gather industry feedback on adapting FRFI legislation and policies, including in respect of artificial intelligence (AI) and other innovations in the financial sector.
- AI Questionnaire - OSFI and the Financial Consumer Agency of Canada (FCAC) jointly released a questionnaire to FRFIs in December to obtain more information on their use of AI, machine learning and quantum computing.
WHAT TO WATCH FOR IN 2024 (AND BEYOND)
- RPAA implementation/PSP registration in 2024:
- Beginning on November 1, 2024, individuals and entities that perform retail payment activities will be required to apply to the Bank of Canada for registration as a PSP and PSPs will be able to submit their applications until November 15, 2024. Beginning on November 16, 2024, PSPs that have not applied for registration will continue to be able to apply but may be subject to delays in commencing their retail payment activities and risk being offside the requirement to be registered before performing retail payment activities.
- On September 8, 2025, the requirement for the Bank of Canada to register PSPs and publish a registry of PSPs will be in force, as well as the remaining substantive provisions of the RPAA and Regulations related to operational risk management, end-user funds safeguarding, reporting, record-keeping and supervisory information.
- We would also expect the Bank of Canada to issue further RPAA guidance in 2024, including in respect of safeguarding of funds, risk management frameworks and administrative monetary penalties.
- Open banking legislation expected to be released in 2024 – As noted above, the federal government announced its intention to introduce legislation establishing an open banking framework in the 2024 federal budget, with the goal of adopting the legislation and fully implementing the necessary governance framework by 2025.
- Mortgage lenders, mortgage brokers and mortgage administrators to become subject to PCMLTFA in 2024 - The PCMLTFA requirements applicable to mortgage lenders, mortgage brokers and mortgage administrators will begin applying as of October 11, 2024.
- New FINTRAC funding model to go into effect – The new FINTRAC funding model will got into effect April 1, 2024.
- Financial Action Task Force (FATF) evaluation for Canada set for 2025 – The international AML/ AYF standards body FATF has scheduled the next evaluation for Canada for 2025. We would expect a number of AML/ATF legislative changes to be put in place ahead of such evaluation.
- OSFI Digital Innovation Sandbox – We would expect OSFI to formally launch its Digital Innovation Sandbox in 2024, as noted in OSFI’s 2022 roadmap.
- Finalized OSFI crypto-asset exposure disclosure guidelineto be released in 2024 - Following the conclusion of its consultations on January 31, 2024, OSFI intends to release draft guidelines for the public disclosure of crypto asset exposure by FRFIs by Fall 2024, with final guidelines communicated by Winter 2025 and implementation slated for Q4 2025.
- OSFI finalized guideline on the regulatory capital and liquidity treatment of crypto-assets to go into effect 2025 – The finalized guideline will be effective Q1 2025.
- OSFI expanding its focus to explore other Fintech developments – As noted in OSFI’s 2022 roadmap, OSFI would expect in 2024 to beyond to explore additional Fintech topics, including (1) crypto asset custody, crypto asset lending, crypto asset issuance, staking, crypto asset derivatives, and DeFi, (2) payment innovation, advanced AI/ machine learning and (3) other subjects, such as quantum computing.
For more information about our firm’s Fintech expertise, please see our Fintech group’s page.