Once a far-off concept, digital assets, including cryptocurrency, have grown dramatically, achieving over US$3 trillion in value last November with no signs of slowing. Extraterritorial application of foreign laws is an emerging concern as cryptocurrency regulations take shape in other countries, notably the United States. While cryptocurrency regulations have yet to develop in Canada, Canadian trading entities need to consider the risks arising from foreign agencies enforcing their own rules extraterritorially.
The United States: broad jurisdiction and extraterritorial reach
In the United States, the regulatory regime that applies to cryptocurrency and other digital assets depends on several factors, including whether cryptocurrency is a security and the type of offering or activity at issue. Currently, oversight digital assets is fragmented, with regulators and other oversight bodies applying existing legal frameworks to the novel digital asset markets. Nevertheless, enforcers in the US have asserted broad jurisdiction over digital assets.
A US court has already acknowledged the broad jurisdiction of the US Securities Exchange Commission (US SEC) by issuing an injunction to stop the delivery of cryptocurrency to foreign investors. In 2019, the US SEC applied for an injunction to stop a company from delivering cryptocurrency to purchasers because the company failed to register before offering a security to the market. The company requested that the court limit the scope of the injunction to prohibit purchases by US persons only. The court dismissed the company’s request on the basis there was a substantial risk the cryptocurrency would be resold to US persons by foreign investors.
The following year, in November 2020, in its publication entitled Cryptocurrency: An Enforcement Framework, the US Department of Justice (US DOJ) set the stage for an aggressive approach to investigating and prosecuting cryptocurrency crime regardless of where alleged perpetrators are located. Of note, the US DOJ takes the position that the US has broad enough jurisdiction to prosecute and seize digital assets where a digital asset transaction merely interacts with financial, data storage or other computer systems within the US or where cryptocurrencies are used to source illegal goods or defraud US citizens.
Potential for international coordination and cooperation?
More recently, President Biden issued an executive order, on March 9, 2022, laying out a national policy for digital assets. The executive order specifically instructs various federal and state government departments to coordinate in regulating digital assets. It also seeks to strengthen international law enforcement of digital asset crime, requiring the attorney general to submit a report to the president on how to strengthen international law enforcement for detecting, investigating, and prosecuting criminal activity related to digital assets.
At the same time, commentary suggests that the US regulatory framework will likely evolve to allow prosecutors to ask courts to seize the digital assets of foreign cryptocurrency exchanges immediately, circumventing the typical issuance of mutual legal assistance treaty requests to the home country. It remains unclear how such action will be received and tolerated by other countries, including Canada, how other countries will cooperate or adopt similar approaches, and how effective the enforcement will ultimately be.
Meanwhile, Canada’s Budget 2022 seeks to prioritize enforcing financial crimes and developing a legislative framework for digital currency. In particular, the federal government plans to provide $2 million in 2022-23 to Public Safety Canada to develop a new Canada Financial Crimes Agency, with further details to be announced in the 2022 fall economic and fiscal update. The federal government also proposes to launch a legislative review focused on the digitalization of money, with $17.7 million to go to the Department of Finance over five years to lead the review of the digital currency sector, including whether a central bank digital currency is needed.
The digital world moves quickly, making it more difficult to use standard extraterritorial procedures to effectively enforce securities and other laws. Where Canadian trading entities have strong ties to the US, they could be the subject of US regulatory enforcement action, including the seizure of digital assets, as regulations are enforced extraterritorially by the US SEC, US DOJ or other agencies. While Canada develops its own regulatory framework for cryptocurrency, in the face of uncertainty surrounding the risk of extraterritorial enforcement, Canadian trading entities ought to consider the impact of the US regime on their businesses.