Guidelines on transactions involving cryptocurrencies: A call to caution

Technology plays a major role in our lives. And because it is constantly evolving, it can sometimes present some challenges. For example, what would you do if the parties told you they wish to use a cryptocurrency for their real estate transaction? Would you know what they are talking about? Could you advise them on this? To help you, the OACIQ has issued guidelines on transactions involving cryptocurrencies, and urges everyone to proceed with the utmost caution.

What are cryptocurrencies? 

Cryptocurrencies (the best known being Bitcoin) are virtual currencies that are not issued by a state authority, such as a central bank; they do not have legal tender status in Canada.

Because they have no value recognized by law, any person may validly refuse to accept them as a method of payment. Transactions concluded using cryptocurrencies therefore require the consent of the parties involved. A cryptocurrency payment does not involve a financial institution or other trusted third party.

Virtual currencies are supported by a computer protocol commonly known as a blockchain (or distributed ledger). Although each cryptocurrency is likely to have its own specific features, all involve the use of cryptography (encryption) and a distributed peer-to-peer network.

Cases of fraud and identity theft have been linked to cryptocurrencies in the past.

The importance of managing risks 

Among the main risks associated with the use of cryptocurrencies, these three can negatively impact a transaction:

• Volatility: The value of a cryptocurrency is not controlled by a centralized agency. It is based solely on the principle of supply and demand, and is subject to frequent and significant fluctuations;
• Operational risk: Generally speaking, foreign exchange transactions that involve cryptocurrencies and legal tender currencies are conducted through trading platforms, most of being located offshore, which are likely to impose delays and affect the availability of cash, and whose legal framework, security and governance currently have deficiencies;
• Money laundering: Given that cryptocurrencies offer the possibility of trading anonymously, they have been used for illegal purposes, including in money laundering operations.

Obligations of real estate brokers

Nothing prohibits the parties to a real estate transaction from using cryptocurrencies. However, as brokers, you must inform them of the risks outlined above.

If you decide to act as intermediary in a transaction involving virtual currencies, you must at a minimum comply with the following obligations: 

• Inform your agency executive officer right from the start;
• Verify the identities of the parties (s. 29 of the Regulation respecting brokerage requirements, professional conduct of brokers and advertising [RBR]) and, if applicable, report suspicious transactions to FINTRAC; 
• Recommend that the parties seek the assistance of a legal expert or accountant (s. 80 of the RBR);
• Advise the parties on the risks associated with the use of cryptocurrencies (s. 83 of the RBR), i.e. mainly by informing them that: 
  • cryptocurrencies carry a high risk of fraud and money laundering;
  • they are volatile;
  • the exchange into legal tender is likely to be subject to delays and to affect the availability of cash for the seller;
  • a cryptocurrency cannot be deposited in a trust account;
  • potential difficulties may arise with the notarization process, with the possibility of having to proceed by private deed;
  • the rules regarding barter transactions under the Income Tax Act apply to a transaction involving a cryptocurrency payment.¹

It follows from the above that your duty to advise and to keep to your field of expertise (s. 73 of the RBR) requires that you have sufficient knowledge of cryptocurrencies to counsel your clients adequately. If you are in any doubt, you must refuse to act in this transaction, since the situation is uncertain and the risks are significant.

Finally, where the use of cryptocurrencies is a particular requirement of the seller, a statement to this effect should be entered under clause 11.1 of the brokerage contract.

Look to future issues of the PRO@CTIVE newsletter for further developments on this topic.

Money laundering reporting form

If you believe you have witnessed an attempt of money laundering or recycling of proceeds of crime involving a real estate broker or agency, the OACIQ provides you with a form so you can report it to us.

¹ www.arc.gc.ca, see especially Interpretation Bulletin IT-490, Barter transactions.