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Canada’s cryptocurrency exchanges will come under the purview of the country’s anti-money-laundering watchdog by next summer, bringing increased accountability to the nascent sector.

The changes to Canada’s anti-money-laundering laws, which come into effect on June 1, 2020, will require virtual-currency dealers – the online marketplaces where people buy and sell bitcoin and other digital tokens – to be registered with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC).

Virtual-currency dealers will also be required to identify all of their clients, report suspicious transactions to the regulator, keep records of clients and transactions and appoint a compliance officer. While a number of cryptocurrency exchanges have already been complying with these rules on a voluntary basis, they will now all be legally required to do so.

The news comes as regulators grapple with how to address risks posed by the emerging cryptocurrency sector. Experts say the move could boost the sector’s legitimacy, but it could also lead to a number of international exchanges pulling out of the Canadian marketplace.

Canadian financial institutions have been hesitant to provide bank accounts and other services to cryptocurrency exchanges because they were viewed as very high risk for money laundering and terrorist financing, said Lori Stein, a partner at Osler who specializes in securities regulation.

“The hope is that now that there is going to be a requirement to register and comply, and oversight by FinTRAC, that banks and other financial entities are going to be more open to providing services to and dealing with virtual-currency businesses," Ms. Stein said. "I think that’s a huge plus.”

However, she added that a number of large international exchanges, which under the new rules will be required to register as foreign money services businesses, could stop servicing Canadian clients.

“It’s going to be interesting to see the extent to which these global players take a sufficient interest in Canada to subject themselves to these rules," Ms. Stein said.

Industry participants said they welcomed regulation, but said that some aspects of the new rules could pose challenges.

For example, it is impossible for exchanges to identify the counterparty to every transaction of $1,000 or more, said Charlene Cieslik, chief anti-money-laundering officer at Toronto-based cryptocurrency exchange Coinsquare.

Currently, the regulations provide some leniency, stating that the information must only be recorded “if obtained in the ordinary course of business" – but if the wording is strengthened at some point it could pose problems, Ms. Cieslik said.

“This has the potential to drive cryptocurrency underground again," Ms. Cieslik said, saying that customers who don’t want their identifying information passed between exchanges could simply transact directly with one another instead of using platforms such as Coinsquare.

Moe Adham, CEO of blockchain startup Bitaccess, questioned the regulators’ ability to enforce the rules, which he described as broader in scope than those enacted in other jurisdictions, such as Europe.

“I expect to see a number of firms relocate outside of Canada, as well as international firms limiting access to Canadians,” Mr. Adham said.

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