Dealing in Virtual Currency: When Crypto Activity Is an MSB Service

Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, a business that deals in virtual currency is a money services business. Domestic businesses are captured by PCMLTFA s. 5(h); foreign businesses that direct services at clients in Canada are captured by s. 5(h.1). Dealing in virtual currency is its own listed service — s. 5(h)(iv) and s. 5(h.1)(iv) — and it spans two distinct activities: virtual currency exchange and virtual currency transfer. A business that performs either one, or both, must register with FINTRAC under s. 11.1 before offering the service.

The analysis runs on facts, not branding. Whether a product is described as a wallet, a protocol, a marketplace, or an app changes nothing; what matters is what the business actually does with custody, control, transfer instructions, and conversion. A 'wallet software' framing does not by itself remove a business from scope — the question is whether the business can hold client funds or execute transfers on a client's behalf.

Exchange means converting between fiat and virtual currency in either direction. A fiat on-ramp — say, a startup that lets Canadians buy virtual currency with a bank transfer — is performing fiat-to-VC conversion, the core exchange activity. A fiat off-ramp, converting virtual currency back to dollars and settling into bank accounts, is simply the mirror image. Neither direction is a safer or lighter version of the other; both trigger the same analysis, and serving Canadian users with bank-funded purchases strengthens the case that the business is in scope.

Crypto-to-crypto swaps deserve the same attention. Exchanging one virtual currency for another can be a VC exchange service even when no fiat is ever involved. A platform that only offers virtual currency trading pairs cannot assume it is outside scope simply because it never touches dollars — the absence of a fiat leg does not remove the swap from the dealing-in-VC analysis.

The second limb is transferring virtual currency at a client's request. A platform that accepts transfer instructions and moves virtual currency to another person or another platform is performing a VC transfer service, even if it never offers an exchange function.

Transfers also carry their own operational duty. Under PCMLTFR s. 124.1 — the virtual currency travel rule — a business sending a VC transfer must include the originator's and beneficiary's name, address, and account or reference number, and take reasonable measures to ensure that information travels with the transfer. This is an information requirement that attaches to the transfer itself, so it needs to be built into the transfer flow rather than bolted on afterward.

When the model is not an obvious exchange, work through the factors that drive the analysis: Who has custody of client assets? Who controls the keys or the ledger entries? Who can initiate or execute a transfer? Where does fiat-to-VC or VC-to-VC conversion actually happen? What does the wallet functionality permit in practice? And are Canadian clients being served?

A practical method is to map the virtual currency flow and the fiat flow separately, then mark every custody, control, and conversion point on each — before launch, not after. Non-custodial claims in particular deserve scrutiny: if the business can freeze, redirect, or execute movements of client value, the 'non-custodial' label may not match the facts.

Where virtual currency is used to pay for goods and services, the payment-service question turns on the actual arrangement: the payer's consent, the agreement with the payee or merchant, how funds move, who controls settlement, and whether the service relates to goods and services. The company's label — gateway, processor, checkout tool — does not decide the outcome.

One historical caution: FINTRAC withdrew its PI-7670 positions on merchant servicing and payment processing effective April 27, 2022. Older interpretations built on those positions are historical context only; a current analysis should rest on the arrangement's actual facts and the current FINTRAC guidance.

A business dealing in virtual currency takes on the standard MSB obligations: FINTRAC registration before operating, large virtual currency transaction reporting per current FINTRAC guidance, virtual currency transaction record-keeping, the travel rule, and a compliance program under PCMLTFA s. 9.6 with the elements set out in PCMLTFR ss. 156–157 — an appointed compliance officer, written policies and procedures, a risk assessment, ongoing training, and a two-year effectiveness review.

Document the scope analysis itself: the flow maps, the custody and control determination at each step, the conclusion reached, the date, and the guidance relied on. When the facts change — adding custody, listing a new trading pair, adding a fiat settlement rail — the analysis should be redone and re-dated, because scope follows the current facts, not the original launch memo.