Scholarly Essay

International Journal
2017, Vol. 72(4) 538–562
The security and ! The Author(s) 2017
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DOI: 10.1177/0020702017741909

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Regulating emerging
technologies in Canada
Evangeline Ducas
School of Public Policy and Administration, Carleton University,
Ottawa, Ontario, Canada

Alex Wilner
Norman Paterson School of International Affairs, Carleton
University, Ottawa, Ontario, Canada

Abstract
Driven by advances in data analytics, machine learning, and smart devices, financial
technology is changing the way Canadians interact with the financial sector. The evolving
landscape is further influenced by cryptocurrencies: non-fiat, decentralized digital
payment systems, like Bitcoin, that operate outside the formal financial sector. While
Bitcoin has garnered attention for facilitating criminal activity, including money launder-
ing, terrorism financing, digital ransomware, weapons trafficking, and tax evasion, it is
Bitcoin’s underlying protocol, the blockchain, that represents an innovation capable of
transforming financial services and challenging existing security, financial, and public
safety regulations and policies. Canada’s challenge is to find the right balance between
oversight and innovation. Our paper examines these competing interests: we provide an
overview of blockchain technologies, illustrate their potential in Canada and abroad, and
examine the government’s role in fostering innovation while concurrently bolstering
regulations, maintaining public safety, and securing the integrity of financial systems.

Keywords
Blockchain, disruptive technology, money laundering, terrorism financing, financial
regulation, cryptocurrency, Bitcoin

Corresponding author:
Alex Wilner, Norman Paterson School of International Affairs (NPSIA), Carleton University, Richcraft Hall,
1125 Colonel By Drive, Ottawa, Ontario, K1S 5B6, Canada.
Email: alex.wilner@carleton.ca
Ducas and Wilner 539

Introduction
Recent technological advancements in financial service delivery in Canada and
abroad have elicited strong reactions and excitement from industry, government,
and consumers alike. Canadians can now transact directly and cheaply through
mobile phone applications, seek investment advice from near-autonomous online
robo-advisors, and access seed funding for new business ventures from a variety of
equity crowdfunding platforms. Advances in other industries, including data ana-
lytics, machine learning, and smart devices, have spurred further developments in
these areas. While the link between finance and technology is nothing new, a
surging interest in the use of technology to deliver financial solutions has resulted
in a collective reimagining of the phenomenon, perhaps best captured by the
increasingly popular portmanteau ‘‘fintech.’’ Many of the recent advancements
in fintech appear to constitute a class of their own. As Douglas Arner and col-
leagues aptly illustrate, we have entered a new period of technological change
across the global financial sector, driven as much by the unprecedented speed of
innovation as by who is driving it.1 The emerging fintech era is characterized by the
entrance of both agile start-ups and established tech giants, such as Apple and
Facebook, which are competing with traditional financial institutions. In addition
to providing new and at times innovative products and services, these changes in
the financial sector landscape have pushed financial actors to revisit antiquated
infrastructure, business practices, and priorities, spurring further innovation.2
Academic attention from various disciplines has been placed on better charting
the novelty of these developments.3 Other work has gone towards understanding
how emerging technology can best be approached from a regulatory perspective.
Central to this discourse is Philip Cerny’s examination of how technological
advancements have historically influenced financial regulation: technology drives
financial globalization, impeding state control over these developments by increas-
ing inter-jurisdictional decentralization.4 Other scholars, like Giselle Datz, have
suggested instead that technological innovation (coupled with global economic
integration) have forced some aspects of the traditional state, including centralized
debt and asset management agencies, to evolve into private sector-like actors.5
Either way, rapid advancements in fintech evoke fresh concerns that contemporary
technological developments are ushering in a new cycle of disruptive innovation,
of economic boom and bust.6

1. Douglas Arner, Janos Barberis, and Ross Buckley, ‘‘The evolution of fintech,’’ Georgetown Journal
of International Law 47 (2016): 1271–1319.
2. Daniela Gabor and Sally Brooks, ‘‘The digital revolution in financial inclusion,’’ New Political
Economy 22, no. 4 (2017): 423–426, at 429–432.
3. Taylor Nelms, ‘‘Alt.economy: Ethnographic explorations of alternative economic imaginaries,’’
Journal of Cultural Economy 9, no. 5 (2016): 508–512.
4. Philip Cerny, ‘‘The dynamics of financial globalization,’’ Policy Sciences 27 (1994): 319–342.
5. Giselle Datz, ‘‘Governments as market players,’’ Journal of International Affairs 62, no. 1 (2008):
35–49, at 45–46.
6. Carlotta Perez, Technological Revolutions and Financial Capital (London: Elgar, 2002); D. Foray
and C. Freeman, eds., Technology and the Wealth of Nations: The Dynamics of Constructed
540 International Journal 72(4)

Compounding these dynamics is the development of cryptocurrencies, non-fiat

decentralized digital currencies and payment systems that operate at a global level,
outside of the formal financial sector. While Bitcoin, the world’s first cryptocur-
rency, has garnered attention for facilitating criminal activity, including money
laundering, terrorism financing, digital ransomware, weapons trafficking, and tax
evasion, it is Bitcoin’s underlying protocol—the blockchain—that has the potential
to alter and transform traditional financial services, and the security and financial
regulations and policies that attend to them.7
Canadian financial institutions and government actors are well-represented
among blockchain proponents. In June 2016, for instance, the Bank of Canada
partnered with Payments Canada, the owner and operator of Canada’s national
payment-clearing and settlement infrastructure, along with several banks and the
R3 consortium of financial institutions, to test the feasibility of using blockchain
to undergird Canada’s interbank payment system, which clears more than
$175 bilion a day.8 Soon after, three Canadian financial institutions—the
National Bank of Canada, Canadian Imperial Bank of Commerce, and ATB
Financial—enlisted the services of San Francisco-based Ripple Labs to integrate
blockchain technology into their respective business practices.9
Despite interest among financial actors to develop and apply blockchain tech-
nologies to their products and services, Canada has yet to fully develop a coordi-
nated regulatory strategy for the successful and safe implementation of these
systems. And while the development of such a strategy is imperative, the policy
and regulatory challenge is significant, requiring the right balance between
oversight and innovation. Potentially disruptive technologies—blockchain
included—necessitate a careful regulatory approach in order to safeguard existing
financial systems and meet security prerequisites. But over-burdening emerging
technologies in cumbersome regulatory frameworks risks undermining the benefits
of innovation altogether. Our paper teases apart these competing inter-
ests—between security, stability, policy, and technological innovation. Until
recently, International Relations (IR) scholarship has largely overlooked and
under-theorized the relationship between technology, global affairs, and political
behaviour. Stefan Fritsch has shown, for instance, that the core paradigms of IR
scholarship treat technology as a passive or exogenous factor to systemic change,

Advantage (New York: St. Martin’s Press, 1993); Jingjing Huo, How Nations Innovate (Oxford:
Oxford University Press, 2015), esp. chapter five.
7. Santander Innoventures, ‘‘The fintech 2.0 paper: Rebooting financial services,’’ 2015, 15; Jane Wild,
Martin Arnold, and Philip Stafford, ‘‘Technology: Banks seek the key to blockchain,’’ Financial
Times, 1 November 2015.
8. While the Bank of Canada found that integrating blockchain into Canada’s interbank payment
system could not yet meet all the ‘‘core international principles for financial market infrastructure,’’
the study suggested that as the technology evolves, so too would its applications. C. Wilkins and G.
Gaetz, ‘‘Could DLT underpin an entire wholesale payment system?’’ The Globe and Mail, 25 May
2017.
9. Ryan Smith, ‘‘Canadian banks sign on to use blockchain tech,’’ Wealth Professional, 23 June 2016.
Ducas and Wilner 541

state power, identity, and political behaviour.10 Our goal is to provide an empir-
ically driven and practically oriented guide for Canadian policymakers that will
serve to inform these larger, ongoing theoretical debates within IR. What oppor-
tunities, challenges, and threats do blockchain technologies present to Canadians?
How might these technologies be properly regulated in keeping with evolving secur-
ity environments and demands? What regulatory strategy provides Canadians with
enough oversight, but leaves room for continued innovation, development, and
application?
Canadian regulators and government decision-makers have only begun to
explore these questions in earnest, despite the fact that a robust financial sector
is crucial to Canada’s economic security. While Canada is seen as a world leader in
financial regulation, partly as a result of having suffered relatively little harm
during the 2008 global financial and 2011 European debt crises, it is now at risk
of lagging behind other international jurisdictions who appear more willing and
better able to simultaneously regulate and foster technological innovation in block-
chain. Furthermore, the Canadian academic literature on the subject, from within
IR at least, is nearly non-existent.11 Canadians of all stripes have much thinking to
do. Relying on private and public-sector documents, media reports, academic lit-
erature, and a set of interviews, we explore the nexus between blockchain, security,
and policy in Canada.
Our argument has five sections. First, we begin by tracing the emergence of
contemporary fintech, situating blockchain technologies within the broader phe-
nomenon. Next, we provide a technical overview of blockchain, relating these
technologies to the financial sector and illustrating their potential in Canada and
abroad. Third, we examine the Canadian government’s role in both fostering finan-
cial sector innovation and maintaining the safety and integrity of the financial
system. Fourth, we explore the various regulatory considerations for blockchain
technologies, including those relating to anti-money laundering and anti-terrorist
financing (AML/ATF). Finally, we explore competing regulatory approaches
common to a number of international jurisdictions, concluding that the regulatory
‘‘sandbox’’ model—a facilitative approach to fintech that eases regulations
in the testing, development, and partial delivery to the public of new
technologies—provides the most suitable approach to regulating blockchain tech-
nologies within the Canadian context.

10. Stefan Fritsch, ‘‘Technology and global affairs,’’ International Studies Perspectives 12, no. 1 (2011):
27–45; Stefan Fritsch, ‘‘Conceptualizing the ambivalent role of technology in international rela-
tions,’’ in Maximilian Mayer, Mariana Carpes, and Ruth Knoblich, eds., The Global Politics of
Science and Technology, vol. 1 (Heidelberg, Germany: Springer, 2014): 115–138.
11. Some regulatory and legal literature has been recently published using the US and the UK as case
studies. See Stephen Middlebrook and Sarah Hughes, ‘‘Regulating cryptocurrencies in the United
States,’’ William Mitchell Law Review 40, no. 2 (2014): 813–838; Chris Rogers and Chris Clarke,
‘‘Mainstreaming social finance,’’ British Journal of Politics and International Relations 18, no. 4
(2016): 930–945; Jeffrey Simser, ‘‘Bitcoin and modern alchemy: In code we trust,’’ Journal of
Financial Crime 22, no. 2 (2015): 156–169; Marcella Atzori, ‘‘Blockchain technology and decen-
tralized governance: Is the state still necessary?’’ Journal of Governance and Regulation 6, no. 1
(2017): 45–62.
542 International Journal 72(4)

Fintech in the current era

From the laying of the first transatlantic cable in 1866 to the introduction of
the automatic teller machine in 1967, financial infrastructure has long been
shaped by technological advancements. Indeed, the financial services industry
has been the largest global purchaser of information technology products and
services since the mid-1990s.12 Global interest and investment in fintech has sky-
rocketed in recent years, growing by 75 percent between 2010 and 2015, to $22.3
billion USD.
Contemporary fintech has emerged from a confluence of factors, including
rising consumer expectations, rapid technological advancements, and both growing
consumer mistrust of financial institutions and increased regulatory scrutiny in
the post-2008 financial crisis era. Within this shifting landscape, traditional
financial institutions are spurred to innovate as they face increasing pressure to
remain relevant and profitable. In addition to directly competing with banks,
and increasingly partnering with or being acquired by banks,13 fintech start-ups
and established technology firms are altering financial services through their cap-
acity to attract capital and talent, and to pre-select the areas of financial service
provision that best leverage their business models and loyal customers. This has
resulted in a financial sector landscape fractured by fintech product and service
offerings.14
These changes within the financial operating environment pose unique chal-
lenges to both financial regulators and market participants alike. While traditional
financial institutions and regulators have a history of working together within well-
established regulatory parameters, fintech firms have had much less interaction
with the financial regulatory system. This has resulted in a proliferation of financial
products and services across the industry that do not fit squarely within existing
regulatory frameworks, or that have failed to fulfill basic compliance requirements
or consumer protection obligations. Not only do fintech upstarts appear at times
ignorant of the laws and regulations that uphold the financial system, but some
firms have expressed a belief that as innovators they should not be held to the same
regulatory scrutiny as their traditional financial sector counterparts.15 Kevin
Sandhu, chief executive of Vancouver-based fintech consumer lender Grow, has
aptly summarized this sentiment: ‘‘[f]intechs, by definition, are different than the
incumbents, and as a result, they present different points of exposure and risk. . . .
Saying that the same regulations that apply to large, multi-national banks should
apply to smaller, nimbler, and niche fintech companies is effectively forcing a
square peg into a round hole.’’16

12. Arner et al., ‘‘Evolution of fintech,’’ 1274–1275.

13. Finextra Research, ‘‘Banks rushing to collaborate with fintech startups,’’ 16 September 2016.
14. Manie Eager, ‘‘Fintech + digital currency – convergence or collision?’’ in S. Chishti and J.
Barberis, Fintech Book (Chichester, UK: Wiley, 2016), 214; Diane Francis, ‘‘Why the next big
banks will actually be tech companies,’’ Financial Post, 5 June 2015; A. Glas and M. Truszel,
‘‘Current trends in financial technology,’’ in Chishti and Barberis, Fintech Book, 13.
15. Arber et al., ‘‘Evolution of fintech.’’
16. Barbara Schecter, ‘‘The great fintech debate,’’ Financial Post, 29 April 2016.
Ducas and Wilner 543

While emerging fintech has undoubtedly complicated the contemporary regula-

tory environment in Canada and abroad, many of these innovations, such as
peer-to-peer lending, have been recognized by Canadian regulators, including the
Bank of Canada, as the next step in the progression of technological development
across the financial sector. In these cases, the main regulatory concerns regarding
consumer protection, market integrity, money laundering, and terrorism financing
are seen as having remained largely consistent and well-managed under existing
regulatory paradigms.17 Blockchain technologies, however, have demonstrated the
potential to upend entire industries, disintermediate traditional financial institu-
tions, and pose regulatory and policy concerns related to governance, legal envir-
onments, financial stability—and, in some cases, criminal investigation, financial
intelligence, and counterterrorism financing measures. And unlike other fintech
innovations, blockchain technologies have led to the development of new products
and services well beyond the financial sector; they have demonstrated their poten-
tial to improve medical record keeping and land title registration, the administra-
tion of humanitarian aid and supply chain management, asset tracking and
registration, and decentralized voting and governance.18 Blockchain technologies
further facilitate the creation of ‘‘decentralized autonomous organiza-
tions’’—entities able to cooperate with one another, and trade and provide services,
based on the collective trust encoded in a blockchain.19 Nonetheless, it is within the
financial services sector that blockchain technologies have shown some of the most
disruptive potential to date. Non-financial start-ups and tech firms have established
a foothold among incumbent financial firms by developing and launching their own
proprietary blockchain systems, which allow them to establish next-generation
payment provisions, loyalty and rewards platforms, smart contracts, asset manage-
ment processes, and exchange platforms.20 Yet, beyond challenging existing prod-
ucts, services, and industry frameworks, the true potential of blockchain
technologies is their capacity to enable open-source distributed consensus. And
while these systems may present innumerable opportunities to industry and
government, they also threaten those unable to respond to their development,
fundamentally challenging conventional approaches to financial sector regulation.
What follows is a technical exploration of blockchain.

17. Carolyn Wilkins, ‘‘Fintech and the financial Ecosystem’’ (remarks at Payments Canada’s
Payments Panorama Conference, Calgary, Canada, 17 June 2016), http://www.bis.org/review/
r160622a.htm (accessed 25 September 2017).
18. Atzori, ‘‘Blockchain technology,’’ 47–52; Melanie Swan, Blockchain: Blueprint for a New Economy
(California: O’Reilly Media, 2015), esp. chapters three and four; Jackie Burns Koven, ‘‘Block the
vote: Could blockchain technology cybersecure elections?’’ Forbes, 30 August 2016.
19. A. Wright and P. De Filippi, ‘‘Decentralized Blockchain Technology and the Rise of Lex
Cryptographia,’’ 10 March 2015, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664
(accessed 25 September 2017).
20. Deloitte University Press, ‘‘Tech trends 2016: Innovating in the digital era,’’ 2016, 82–83;
International Monetary Fund (IMF), ‘‘Virtual currencies and beyond,’’ staff discussion note,
2016, 23; Wild et al., ‘‘Technology: Banks.’’
544 International Journal 72(4)

Figure 1. A look at blockchain technology (modified from PricewaterhouseCoopers, 2015).

What is blockchain?
The conceptual origins of blockchain technology can be traced back to the release
of a 2008 white paper to a cryptography mailing list by an individual, or group of
individuals, operating under the pseudonym Satoshi Nakamoto. The paper pro-
posed the design of a purely peer-to-peer (P2P) electronic version of cash, capable
of eliminating the need for central authorities and intermediaries in the payments
system. Nakamoto’s treatise is regarded as the genesis of the open-source Bitcoin
software released in 2009. Following significant adoption in recent years, Bitcoin is
currently regarded as both a digital currency and a payments infrastructure.21 Its
strength, according to Nakamoto, is its ability to circumvent ‘‘the weaknesses of
the trust based model’’ inherent to all traditional financial systems. Moreover, the
cryptocurrency’s underlying protocol—the set of rules and processes that govern
interactions within the system—provides a solution to the financial sector’s inabil-
ity to conduct irreversible transactions, while eliminating the high mediation and
transaction costs that come with requiring the services of financial intermediaries,
as well as the possibility of financial fraud.22
Blockchain is best understood as a digital distributed ledger used to record and
share information throughout a peer-to-peer network (see Figure 1). Identical
copies of the ledger are maintained and collectively validated by network members,
with accepted information aggregated into ‘‘blocks,’’ which are added to a

21. For a detailed theoretical exploration of how best to define and conceive of Bitcoin, see Ole Bjerg,
‘‘How is bitcoin money?’’ Theory, Culture, & Society 33, no. 1 (2016): 53–72; and Simser, ‘‘Bitcoin
and modern alchemy,’’ 158–160.
22. Deloitte Australia, ‘‘Bitcoin, blockchain & distributed ledgers,’’ 2016, 5; Satoshi Nakamoto,
‘‘Bitcoin: A Peer-to-Peer Electronic Cash System,’’ 2008, https://bitcoin.org/bitcoin.pdf (accessed
25 September 2017).
Ducas and Wilner 545

chronological ‘‘chain’’ of existing, previously validated blocks, using a crypto-

graphic signature. Each new block is timestamped—a process of digitally encoding
time that corresponds to the creation of new and immutable data—and contains
information referencing the block that preceded it, ensuring that any attempt to
tamper with the blockchain would require the alteration of every block previously
created, a near-impossibility given the decentralized nature of the technology.
Importantly, blockchain has surpassed its Bitcoin origin. Among its many attri-
butes, the technology is perhaps most remarkable for its ability to ensure digital
authenticity without third-party intervention, ultimately ensuring ‘‘trust’’ through
cryptographic proof in inherently trust-less environments.23 The technology is also
both highly secure and resilient, employing public key cryptography—a form of
algorithmic encryption which makes it impossible to corrupt the blockchain—to
protect value transfer and ownership, and decentralized networks, to ensure that
each system is devoid of central points of trust or failure.24 Furthermore, block-
chain can be highly efficient, enabling peers to transfer value directly to one another
without intermediaries, permitting quick and low-cost transmission of information
and value across vast networks. Finally, the technology is transparent, providing
an immutable record of all transactions that have ever occurred on the protocol’s
distributed ledger.25

Types of blockchains
Blockchain technology has evolved over time through the creation of new and
diverse systems, each serving specific functions through the incorporation of per-
missions, rules, smart contracts, digital signatures, and various other features.26
These disparate blockchains can be categorized by the openness of their networks
and the nature of their validation process, with each blockchain type exhibiting
unique features and vulnerabilities which elicit very different regulatory and secur-
ity considerations. Blockchains can thus either be public, where the abilities to both
read and submit transactions for inclusion in the blockchain are unrestricted, or
private, where these abilities are limited to predetermined individuals or entities.
While all information recorded on the blockchain is universally accessible in a
public system, pseudonyms are assigned to network participants, which enhances
privacy but obscures identity. Conversely, in private systems, user identification is
central to system use and can be required to conform to certain specifications, such
as traditional know-your-customer (KYC) regulatory obligations. These design
features have rendered private blockchains more congruent with the existing

23. Trevor Kiviat, ‘‘Beyond Bitcoin: Issues in regulating blockchain transactions,’’ Duke Law Journal
65, no. 3 (2015): 577; Nakamoto, ‘‘Bitcoin,’’ 1.
24. Alex and Don Tapscott, Blockchain Revolution (Toronto: Penguin, 2016), 6.
25. Andres Guadamuz and Chris Marsden, ‘‘Blockchains and bitcoin,’’ First Monday 20, no. 12
(2015): 6.
26. UK Government Office for Science, ‘‘Distributed ledger technology: Beyond block chain,’’
2016, 6.
546 International Journal 72(4)

Figure 2. Understanding blockchain types (Credit Suisse, 2016).

financial system, leading to significant interest and investment in these systems

across the financial sector.27
Blockchains can be permissionless, where participation in the network consensus
process is open to any individual or entity with the technical capacity to validate
and add transactions to the network, or permissioned, where this process is limited
to known entities (see Figure 2). In the absence of a centralized authority, block-
chains are secured through cryptographic verification. This verification process can
be costly; it hinges on expending computational processing power to solve complex
cryptographic problems, often in the form of ‘‘proof-of-work’’ processes.28 In the
case of permissionless systems, members are incentivized to engage in this compu-
tational process through the promise of an economic reward: a cryptocurrency is
issued to network members who successfully create a new validated block.
Examples of these systems include Bitcoin and the hundreds of alternative crypto-
currencies—or ‘‘altcoins’’—like Ethereum, Litecoin, and more recent iterations
that provide enhanced user anonymity, such as Monero, Dash, and Zcash.
Alternatively, no incentive structure (i.e. cryptocurrency issuance) is required to
maintain a permissioned blockchain: pre-selected actors in the network, such as a
consortium of financial institutions or a group of government departments, are
simply tasked to verify and validate the data. These systems are considered par-
tially decentralized, as network participation is limited to known actors.

27. IMF, ‘‘Virtual currencies,’’ 21; Deloitte UK, ‘‘Blockchain: Enigma, paradox, opportunity,’’ 2016,
6; Greg Roberts, ‘‘Blockchains may raise red flags for bank regulators,’’ Bloomberg, 13 September
2016; Tim Swanson, ‘‘Consensus-as-a-service: A brief report on the emergence of permissioned,
distributed ledger systems,’’ 2015, 6. Self Published. See http://www.ofnumbers.com/2015/04/06/
consensus-as-a-service-a-brief-report-on-the-emergence-of-permissioned-distributed-ledger-sys-
tems/ (accessed November 2017).
28. Deloitte UK, ‘‘Blockchain: Enigma,’’ 6.
Ducas and Wilner 547

Figure 3. Applying business logic to smart contracts (Jo Lang, R3 CEV, as cited in Swanson,
2015, 18).

In addition to recording information and data, the algorithmic technology

underlying blockchain can be used to verify or enforce contractual agreements
using ‘‘smart contracts,’’ which encode traditional contractual terms into a com-
puter program and execute them automatically.29 Coupled with blockchain tech-
nology, smart contracts bypass the need for traditional intermediaries with the
ability to self-execute, self-enforce, self-verify, and self-constrain the performance
of a contract (see Figure 3). This technology is lauded for its ability to facilitate
automation and eliminate manual processes; increase speed, efficiency, and trust in
contractual enforcement; reduce the risk of moral hazard (e.g. strategic default);
and reduce verification and enforcement costs.30 By automating the movement of
pre-determined assets under certain conditions, blockchain-enabled smart con-
tracts can be employed across the financial sector, including in securities, syndi-
cated lending, trade finance, swaps, derivatives and other complex financial
products. For example, smart contracts could execute payments with complex
terms and conditions, such as those found in many financial derivatives contingent
on external events and price fluctuations.31

Blockchain applications in the financial sector

Financial sector interest in blockchain technologies has been largely limited to private
permissioned systems. Owing to the security concerns associated with public permis-
sionless networks—which are open to honest and malicious actors

29. UK Government Office for Science, ‘‘Distributed ledger technology,’’ 6; IMF, ‘‘Virtual curren-
cies,’’ 23.
30. Swanson, ‘‘Consensus-as-a-service,’’ 16; IMF, ‘‘Virtual currencies,’’ 23; UK Government Office
for Science, ‘‘Distributed ledger technology,’’ 24.
31. Santander Innoventures, ‘‘Fintech,’’ 15; Swanson, ‘‘Consensus-as-a-service,’’ 16; IMF, ‘‘Virtual
currencies,’’ 23.
548 International Journal 72(4)

alike—permissioned systems are more easily scalable, and allow financial actors to
reap benefits from blockchain technology while maintaining control over internal
operations and complying with existing regulations, including KYC, anti-money laun-
dering, and anti-terrorist financing requirements. To date, financial industry actors
have identified two dozen uses for blockchain, the most promising of which include:

. Payment processing: Contemporary payment processing systems are cumber-

some, often involving multiple intermediaries, customer fees, and lengthy rec-
onciliation tasks. Blockchain technology could enable financial institutions to
connect directly to each other, ultimately shortening settlement periods, decreas-
ing the cost of cross-border transactions, speeding up transactions, and reducing
the risk of fraud.32
. Post-trade settlement (e.g. corporate loans, credit default swaps, derivatives):
Blockchain technology could solve cluttered post-trade settlement processes
by providing enhanced audit and regulatory functions, as information is more
easily tracked and visible by all parties, enhancing resolution management cap-
abilities. The technology further provides opportunities to greatly shorten post-
trade settlement periods from the current standard of trade date plus three days
(T+3), to near instantaneous settlement.33 Blockchain may be particularly
useful for assets that have the least efficient netting, clearing, and collateral
management, and the longest clearing periods.34
. Securities issuance and servicing: Blockchain technologies provide an alternative to
inefficient and, at times, inaccurate manual processes of issuing and exchanging
shares in private companies, by providing a permanent digital record of securities
transfer among private users. This will improve accounting, auditing, and regula-
tory supervision functions while increasing transparency of ownership.35
. Trade finance: The contemporary trade finance system must ensure that goods
have transferred before payment is made. The real-time visibility of data enabled

32. Several Canadian banks are implementing this technology. Oscar Williams-Grut, ‘‘Santander is
experimenting with Bitcoin and close to investing in a blockchain startup,’’ Business Insider UK,
17 June 2015.
33. Several fintech start-ups, including Digital Asset Holdings, SETL, and Clearmatics are providing
blockchain technology solutions for post-trade processes at an industrial scale. Morgan Stanley,
‘‘Global insight: Blockchain in banking,’’ April 2016, 5; Credit Suisse, ‘‘Blockchain: The trust
disrupter,’’ 3 August 2016, 14.
34. Morgan Stanley, ‘‘Global insight,’’ 5; Ian Allison, ‘‘Ethereum-inspired Clearmatics to save OTC
markets from eternal darkness,’’ International Business Times, 22 February 2016; Finextra
Research, ‘‘SETL launches OpenCSD platform to rewire post-trade processing,’’ 1 June 2016;
Luke Parker, ‘‘DTCC and digital asset holdings target trillion-dollar repurchase agreement
market,’’ Brave New Coin, 30 March 2016.
35. For illustration, Overstock.com obtained regulatory approval to use blockchain technologies to
digitally issue bonds and equities using the Bitcoin blockchain from the American Securities and
Exchange Commission, and Nasdaq’s Linq, a blockchain-based platform and ledger system
enabling private securities issuance. Deloitte, ‘‘Tech trends 2016,’’ 86; IMF, ‘‘Virtual currencies,’’
23; Andrew Harnik, ‘‘SEC approves plan to issue stock via Bitcoin’s blockchain,’’ Wired,
15 December 2015; Nasdaq, ‘‘Nasdaq Linq enables first-ever private securities issuance docu-
mented with blockchain technology,’’ 30 December 2015.
Ducas and Wilner 549

by blockchain technologies ensures that all parties, including financiers, trading

houses, and other intermediaries, are able to witness when goods have shipped
and can release funds accordingly.36
. Regulatory compliance: Blockchain technology could automate regulatory compli-
ance requirements, such as KYC processes, reducing compliance errors. While the
technology is commonly associated with pseudo-anonymity, the technology can be
used to connect real-world identities to cryptographic identities in a database.
Implementation of these systems—such as blockchain-based identification regis-
tries—would not only remove duplication efforts in carrying out identification
processes across institutions, but could also enable encrypted updates of client
details to be distributed to trusted blockchain network members in near real-time.37

As these various applications highlight, the financial services sector has recog-
nized the potential of blockchain technologies to provide enhanced speed, security,
transparency, efficiency, cost-savings, and accuracy across multiple business lines.
These prospective gains have led to aggressive investment in the technology, with
financial institutions expected to spend over $1 billion USD on blockchain-related
projects in 2017 alone.38 As noted, Canadian banks are experimenting with these
technologies: in June 2016, for example, Alberta-based ATB Financial conducted
the first international money transfer using blockchain technology in partnership
with Germany’s ReiseBank and Ripple Labs.39 Canadian membership has also
been significant in many of the blockchain consortiums pervasive across the indus-
try, including R3 CEV, a group of over 80 of the world’s largest financial institu-
tions leading the financial market’s foray into blockchain.40
Despite clear private-sector interest in the technology, there are several factors
preventing widespread adoption of blockchain technologies across the formal
financial system in their current form. Most notably, the scalability of the original
Bitcoin blockchain—its capacity to grow and accommodate more interactions—is
not promising. For instance, only a limited number of simultaneous transactions
can be written into the blockchain at any given time. There is a gap, too, between
the period in which new additions to the ledger are made and later confirmed into
blocks. Further, there is a significant cost associated with running public permis-
sionless blockchains, like that supporting Bitcoin, in terms of network bandwidth,

36. The first international trade transaction between two independent banks using blockchain tech-
nology was conducted in October 2016, involving a shipment of cotton from Texas, USA, to
Qingdao, China. World Economic Forum, ‘‘The future of financial infrastructure,’’ August
2016, 21; Morgan Stanley, ‘‘Global insight,’’ 6; Byron Kaye, ‘‘Major banks mark first-ever inter-
national trade using blockchain tech,’’ Reuters, 24 October 2016.
37. Several companies, including I/O Digital, ShoCard, and others, have created systems enabling
businesses to add encrypted client documents and identity information to a blockchain. Goldman
Sachs, ‘‘Profiles in innovation,’’ 24 May 2016, 74; Deloitte UK, ‘‘Blockchain applications in
banking,’’ 1.
38. Magister Advisors, ‘‘Blockchain & bitcoin 2016: A survey of global leaders,’’ December 2015, 32.
39. Jane Wild, ‘‘Ones to watch: The rise of online-only money,’’ Financial Times, 2 November 2016.
40. Digital Finance Institute, ‘‘Fintech in Canada,’’ 2016, 6, http://www.digitalfinanceinstitute.org/
wp-content/uploads/2017/02/Digital-Finance-Institute-FinTech-Report-1.pdf.
550 International Journal 72(4)

storage, and processing power. Moreover, as new and untested technologies, both
permissioned and permissionless blockchains elicit concerns regarding business
continuity and data preservation in the medium- to long-run by businesses employ-
ing these technologies.41 As a result, new blockchain iterations are emerging to
address these issues, which tend to incorporate permissioned networks, increasingly
centralized systems, and varying block sizes.42 While the widespread adoption of
blockchain across the financial sector is far from certain, the technology clearly has
the potential to alter financial sector infrastructure and reform the manner in which
financial institutions interact with clients and regulators alike. This nascent stage of
blockchain development represents a pivotal opportunity for governments and
regulators to engage proactively with industry stakeholders to help shape the
future development of this technology, while minimizing identifiable risks to
public safety and financial stability and maximizing national economic benefit.

Canadian fintech: Promises and pitfalls

Governments across the globe have identified the fostering of innovation as a critical
economic priority. Promoting fintech, in particular, is viewed as a mechanism able to
tackle a variety of public policy issues, including increasing household financial health,
providing small and medium enterprises with improved access to financing, improving
cybersecurity in the formal financial sector, and enhancing financial inclusion in
developing economies.43 Given its potential application across and beyond the finan-
cial sector, blockchain is being actively developed and promoted in the United
Kingdom, the United States, China, Switzerland, Singapore, and a growing list of
other countries. However, blockchain technologies butt against a range of other eco-
nomic and security imperatives. Governments are tasked with identifying the appro-
priate balance between fostering innovation and safeguarding security. In Canada,
these dual priorities are evident. What follows is an exploration of both.
Encouraging innovation is a priority for Canada, where the financial sector holds
particularly significant economic importance, directly accounting for nearly 800,000
jobs and 7.0 percent of gross domestic product.44 Given the pace of financial sector
transformation, continued Canadian innovation across the industry will be critical to
remaining internationally competitive and to achieving levels of productivity required
for economic growth.45 For illustration, according to the Digital Finance Institute,

41. Victoria L. Lemieux, ‘‘Trusting records: Is blockchain technology the answer?’’ Records
Management Journal 26, no. 2 (2016): 170–184.
42. Morgan Stanley, ‘‘Global insight,’’ 11–12; The Economist, ‘‘The next big thing: Blockchain,’’
9 May 2015.
43. Adrienne Harris, ‘‘The future of finance is now,’’ The White House Blog, 10 June 2016.
44. Conference Board of Canada, ‘‘Better together: Building on the strengths of Canada’s four global
financial centres,’’ 2016, http://www.conferenceboard.ca/press/newsrelease/16-07-12/
better_together_building_on_the_strengths_of_canada_s_four_global_financial_centres.aspx.
45. Ernst & Young, ‘‘EY Fintech Adoption Index: Canadian findings,’’ http://www.ey.com/ca/en/
services/advisory/advisory-for-financial-services/ey-fintech-adoption-index-canadian-findings,
2016.
Ducas and Wilner 551

a Vancouver-based fintech think tank, fostering a Canadian fintech ecosystem could

contribute to continued Canadian leadership in the global financial sector, attract
international investment in Canadian technology, build local talent pools, create
employment opportunities to offset losses in disrupted sectors, and open trade oppor-
tunities to export fintech talent, products, and services.46
Current Canadian initiatives to achieve these ends include the federal govern-
ment’s Innovation Agenda and the Competition Bureau’s Fintech Market Study,
examining innovation in the domestic financial services sector, both launched in
2016. Led by the minister of innovation, science and economic development, the
Innovation Agenda’s commitment to ‘‘compete in a digital world’’ provides
Canadian fintech companies a competitive boost in the digital economy, while
supporting innovation across the sector.47 Other federal activities related to fintech
development are being pursued elsewhere. For example, the Financial Transactions
and Reports Analysis Centre of Canada (FINTRAC), the Canadian financial intel-
ligence unit and AML/ATF regulator, conducts research on and monitors fintech
activities. Other members of Canada’s security and intelligence community, not-
ably the Royal Canadian Mounted Police and Communications Security
Establishment, are similarly exploring how fintech and blockchain technologies
relate to their investigative and intelligence mandates and capabilities.48 The
Department of Finance is exploring P2P payments regulation and public policy,
and the Bank of Canada is conducting fintech research and experimenting with
blockchain technology.
Despite these early efforts, however, Canadian fintech stakeholders have been vocal
about hurdles to domestic market development, with certain high-profile firms dis-
mantling local activities in favour of operating in more permissive regulatory jurisdic-
tions overseas. Most notably, Ethereum, a blockchain-based platform largely
conceived by Canadians living in Canada, moved its operations to Switzerland,
partly because of the difficulty it had working within Canada.49 In this vein,
Canadian fintech firms have signalled frustration with a complex and poorly defined
regulatory environment. Prominent financial regulators, including the Department of
Finance, FINTRAC and the federal prudential regulator, the Office of the
Superintendent of Financial Institutions, have been reticent to clearly define the regu-
latory treatment of all fintech entrants, particularly with regards to their classification
as money services businesses (MSBs).50 This regulatory uncertainty may limit the

46. Digital Finance Institute, ‘‘Fintech in Canada,’’ 3, 6, 39.

47. Government of Canada, ‘‘Positioning Canada to lead: An inclusive innovation agenda,’’ 26 July
2016.
48. Alex Wilner, open-ended interview with Canadian intelligence personnel from Communications
Security Establishment, 27 June 2016, regarding the nexus between blockchain, cryptocurrencies,
and intelligence practices. See also Alexandra Posadzki, ‘‘Watchdog assessing fintech startup’s
vulnerability to financial crime,’’ The Globe and Mail, 18 August 2016; Jesse Willms, ‘‘Canadian
banks experiment with blockchain technology,’’ Bitcoin Magazine, 28 July 2016.
49. Alex Wilner, open-ended interview on Canadian and international regulations and blockchain
innovation, with Dr. Ethan Wilding, resident philosopher, Ethereum, 12 May 2016.
50. Willms, ‘‘Canadian banks experiment.’’
552 International Journal 72(4)

ability of fintech firms to solicit venture capital and investment needed to fuel their
growth, and, given potential money-laundering concerns, slow their establishment of
traditional banking relationships with financial institutions.51
Notwithstanding current market impediments, Canada is uniquely placed to
become a global fintech leader. First and foremost, Canada is globally renowned
for its strong and stable financial system, which has achieved successive rankings as
the soundest in the world. It is composed of both major banks that have long
championed consumer-focused financial service delivery, and a rapidly expanding
fintech sector offering Canadians options that are convenient, cost-effective, and
tailored to their needs. These factors are reinforced by business-friendly policy and
regulatory environments, leading Canada to be recognized by the World Bank
Group as the third best economy worldwide in which to start a business, and
fourteenth for overall ease of doing business.52 Canada is additionally well-
placed geographically, with access to investors and business opportunities in the
United States, Europe, and Asia.
Canadian strengths in the blockchain field are equally numerous. Home to
strong tech and cybersecurity sectors, Canada has the infrastructure and talent
needed to support homegrown blockchain development and applications.
Leading university programs in computer engineering and quantum computing
have produced a generation of young Canadians driven towards innovation.
Furthermore, several of the world’s leading blockchain firms, including
Ethereum and ConsenSys, were developed or founded in Canada, providing experi-
ence and expertise to individuals who have since gone on to found new Canadian
blockchain initiatives.53 These factors have contributed to a growing number of
innovative Canadian start-ups offering blockchain products and services, fostering
a growing and vibrant Canadian blockchain ecosystem.

The Canadian regulatory landscape

The success of blockchain technology in Canada will ultimately rely on the wider
legislative and regulatory environment in which it develops. Similar to approaches
undertaken in other international jurisdictions, the Canadian legislative and regu-
latory approach to blockchain and related emerging technologies has predomin-
antly focused on cryptocurrencies, such as Bitcoin, and has largely attempted to
treat these technologies with pre-existing statutes and regulatory frameworks.54

51. Arner et al., ‘‘Evolution of fintech’’; Christine Duhaime, ‘‘FinTechs are being derisked out of bank
accounts over terrorist financing and money laundering risks say UK study,’’ Duhaime’s Anti–
Money Laundering Law in Canada, 29 May 2016; Willms, ‘‘Canadian banks experiment.’’
52. World Economic Forum, ‘‘Global Competitiveness report 2014–2015,’’ 147; World Bank Group,
‘‘Doing business 2016,’’ 2015, 193; Digital Financial Institute, ‘‘Fintech in Canada,’’ vi.
53. Alex Tapscott, ‘‘Blockchain is a disruption we simply have to embrace,’’ The Globe and Mail,
9 May 2016.
54. Jillian Friedman, ‘‘Canada,’’ in Stuart Hoegner, ed., The Law of Bitcoin (Bloomington: iUniverse,
2015), 17; Kiviat, ‘‘Beyond Bitcoin,’’ 589; Lawrence Trautman, ‘‘Is disruptive blockchain technol-
ogy the future of financial services?’’ Consumer Finance Law Quarterly Report (forthcoming): 20.
Ducas and Wilner 553

This approach has resulted in a multifaceted regime with overlapping levels

of regulation between federal, provincial, and territorial governments, with
different regulatory bodies responsible for different components of the financial
system.
Given the inherent interlinkage of cryptocurrencies and blockchain, the regula-
tory treatment of these virtual currencies can be extrapolated to inform our under-
standing of the policy landscape relevant to this nascent technology.
Cryptocurrencies are neither regarded as currency nor money in a legal sense in
Canada, and are thus exempt from regulatory oversight by any government or
central authority, such as the Bank of Canada. Nor are cryptocurrencies covered
by deposit insurance, or subject to consumer protection measures.55 However, they
are treated as commodities by the Canada Revenue Agency, and as such are subject
to the barter rules of the Income Tax Act.56 The treatment of cryptocurrencies as
securities, particularly in conjunction with smart contract technologies, is not
entirely evident, and will require future clarity from provincial and territorial secu-
rities regulators.
The introduction of concrete measures to regulate business facilitating crypto-
currency transactions occurred in 2014 with amendments to Canadian federal
AML legislation, the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act. In recognition of the strong possibility that emerging technologies
could be abused for money laundering and terrorist financing purposes, these
amendments were introduced to enhance FINTRAC’s ability to disclose to federal
partners threats to Canada’s security relevant to the use of virtual and cryptocur-
rencies in criminal activity. These specific changes included an expanded definition
of MSB to include persons engaged in the business of ‘‘dealing in virtual curren-
cies.’’ The precise meaning of ‘‘dealing in virtual currencies,’’ however, has not yet
been determined and is currently being developed by the federal Department of
Finance.57
Depending on the activities undertaken, businesses or other entities employing
blockchain technologies may be subject to other federal, provincial, or territorial
legislation related to trade and commerce in Canada more generally. This includes
the federal Competition Act, which incorporates consumer protection provisions,
such as requirements that companies refrain from deceptive marketing practices.
Additional consumer protection legislation has been enacted at the provincial and
territorial levels, such as the British Columbia Business Practices and Consumer
Protection Act, and the Ontario Consumer Protection Act, which are applicable to

55. Financial Consumer Agency of Canada, ‘‘Digital Currency,’’ September 2017, https://www.cana-
da.ca/en/financial-consumer-agency/services/payment/digital-currency.html (accessed 7
November 2017).
56. Canada Revenue Agency, ‘‘Fact Sheets 2013: What you should know about digital currency,’’
2014, https://www.canada.ca/en/revenue-agency/news/newsroom/fact-sheets/fact-sheets-2013/
what-you-should-know-about-digital-currency.html.
57. Friedman, ‘‘Canada,’’ 30–31; M. P. Ponsford, ‘‘Comparative analysis of Bitcoin and other decen-
tralised virtual currencies,’’ Hong Kong Journal of Legal Studies 9 (2015): 29–50, at 41–43;
Posadzki, ‘‘Watchdog.’’
554 International Journal 72(4)

fintech companies operating in those jurisdictions. Companies employing block-

chain may also be subject to provincial, territorial, and federal privacy legislation,
such as the Personal Information Protection and Electronic Documents Act, which
regulates how private sector companies collect, organize, and use private and per-
sonal information in their commercial activities.58 A Canadian business employing
blockchain technology is therefore required to answer to a complex network of
regulatory bodies located across various levels of government, demanding that it
employ a comprehensive approach to regulatory compliance and seek costly regu-
latory counsel to help navigate this complicated environment.
Regardless of the complexity of the current regulatory landscape, the Canadian
approach is perceived to be largely permissive of cryptocurrency and blockchain
technology use and development when compared with other jurisdictions world-
wide.59 There is reason to believe that the overall sentiment across Canadian gov-
ernments regarding these technologies is fairly positive and reflective of the
potential opportunities they present. This is evidenced by the research and experi-
mentation in blockchain and fintech undertaken by the Bank of Canada, as well as
calls for a ‘‘light regulatory touch’’ for blockchain by the Senate Standing
Committee on Banking, Trade and Commerce.60

Regulatory considerations for blockchain technologies

The development of a coordinated regulatory framework for blockchain technol-
ogies in Canada has significantly lagged behind market innovation. This delay is
neither unprecedented within the greater context of regulating emerging technolo-
gies, nor necessarily detrimental to efficient market regulation. The wait-and-see
approach has allowed Canadian policymakers and regulators to remain neutral as
markets dictate whether and where these technologies will achieve significant adop-
tion, and to draw on observable data to inform a deeper understanding of the risks
created over time.61 This reactive regulatory approach can even facilitate techno-
logical innovation, allowing regulators to better understand the technical funda-
mentals of these new technologies, as well as the benefits and applicability of their
uptake, prior to regulatory intervention.
However, in addition to subjecting market participants to regulatory uncer-
tainty, allowing blockchain technologies to develop unchecked by coordinated
regulatory measures introduces a host of risks that potentially threaten the safety
and stability of the Canadian financial system. The threat is multifaceted, given the
diversity of the contemporary blockchain ecosystem and the risks posed by each

58. Digital Finance Institute, ‘‘Fintech in Canada: British Colombia Edition 2016,’’ 2016, 16.
59. Map, BitLegal.io, 2016.
60. Theophilos Argitis and Dough Alexander, ‘‘Bank of Canada experimenting with blockchain-type
technology,’’ Bloomberg, 16 June 2016; Government of Canada, ‘‘Positioning Canada to lead,’’ 8.
61. Arner et al., ‘‘Evolution of fintech’’; European Securities Monetary Authority, ‘‘Regulation and
DLT: Working to strike the right balance,’’ 22 November 2016, 2; Canadian Senate Banking
Committee, ‘‘Digital currency: You can’t flip this coin!’’ June 2015, 8.
Ducas and Wilner 555

variant of blockchain technology. For example, the transaction pseudonymity

provided by public permissionless blockchains, such as Bitcoin, presents several
operational and legal risks, and may be particularly vulnerable to money launder-
ing, terrorism financing, fraud, and other financial crimes. Private permissioned
blockchains may pose fewer risks to the integrity of the financial system, given their
relative alignment with existing regulations and financial sector business models.
What follows is an exploration of the specific risks posed by blockchain
technologies.

Money laundering, terrorist financing, and other criminal activity

Blockchain technologies, particularly public permissionless systems, can be abused
for illicit purposes. This is primarily a result of their ability to facilitate pseud-
onymous—and in some cases fully anonymous—cryptocurrency transactions
across international borders quickly and without third-party oversight or interven-
tion. Lacking the strict governance structures of traditional fiat payment systems,
permissionless blockchains are unable to impose any obligation on users to verify
user identity or cross-check watch-lists or embargoed countries.62 These character-
istics may facilitate crimes like terrorism financing, weapons trafficking, ransom-
ware, and tax evasion, and have elicited strong regulatory concern from AML/
ATF regulators in Canada and abroad.63 The association between cryptocurrencies
and illegal activities is further augmented by the exclusive use of these currencies
across illegal online services and marketplaces accessed through an encrypted layer
of the Internet, the so-called ‘‘dark net.’’ This dark net cryptocurrency standard is
largely credited to the infamous Silk Road marketplace, known as much for retail-
ing illegal drugs as for the dramatic takedown of its founder, Ross Ulbricht, aka
‘‘Dread Pirate Roberts,’’ by the Federal Bureau of Investigation (FBI) in 2013 after
nearly three years of operation.64 Following Silk Road’s demise, countless dark net
markets have subsequently emerged to facilitate the purchase of illegal goods,
including controlled substances and narcotics, child exploitation materials, fake
passports, weapons, and other nefarious goods and services.65 This dark net
ecosystem additionally supports a host of privacy enhancing tools known as
‘‘tumblers’’ or ‘‘mixers,’’ which can obscure value ownership and transaction his-
tories on blockchain ledgers, rendering them highly vulnerable to abuse for money

62. Gareth Peters, Efstathios Panayi, Ariane Chapelle, ‘‘Trends in crypto-currencies and blockchain
technologies: A monetary theory and regulation perspective,’’ Journal of Financial Perspectives 3,
no. 3 (winter 2015): 7.
63. IMF, ‘‘Virtual currencies,’’ 5.
64. The Economist, ‘‘Buying drugs online: Shedding light on the dark web,’’ 16 July 2016, http://
www.economist.com/news/international/21702176-drug-trade-moving-street-online-cryptomar-
kets-forced-compete (accessed 8 October 2017); P. Vigna and M. Casey, The Age of
Cryptocurrency: How Bitcoin and the Blockchain are Challenging Global Economic Order (New
York: St. Martin’s Press, 2015), 84.
65. EUROPOL, ‘‘Massive blow to criminal dark web activities after globally coordinated operations,’’
20 July 2017.
556 International Journal 72(4)

laundering and other forms of financial crime.66 Despite these risks, however, there
is growing interest in private permissioned blockchain systems which raise fewer
regulatory concerns because they are employed in closed systems administered by
regulated entities, such as financial institutions, with long histories of KYC process
implementation and compliance with existing regulatory obligations.

Consumer protection
To date, public permissionless blockchains have offered little by way of consumer
protection. In various instances, cryptocurrency users have been subject to scams,
theft, or other fraudulent operations when interacting with non-regulated system
intermediaries, such as cryptocurrency exchanges or hosted wallet providers.67
Consumer vulnerability to exploitation is further enhanced due to the irreversibility
of transactions under blockchain protocols. Due to both the limited regulation of
cryptocurrency intermediaries, as well as the decentralized governance structure of
these systems, victims have been left with little avenue for legal recourse. These
risks, however, are again minimized under private permissioned systems employed
by regulated entities familiar with prevailing consumer protection obligations.

Macroeconomic and monetary policy considerations

As both currencies and payments infrastructures, public permissionless blockchains
have received significant attention from central banking authorities worldwide.
While assessments have demonstrated that cryptocurrencies fail to satisfy full
requirements of ‘‘money’’ from an economic perspective due to their high price
volatility and low acceptance rate—and thus pose little threat to national monetary
stability in their current form—concerns have been raised that future iterations of
cryptocurrencies might yet influence national monetary policy objectives.68 Should
new generations of cryptocurrencies achieve systemically significant uptake, subse-
quent effects on the demand for cash across jurisdictions could substantially impact
the ability of central banks to conduct effective monetary and macroeconomic
policy.69 Developments of public permissionless blockchain systems thus require
long-term monitoring by governments and central banks. These risks are, however,
largely absent under private permissioned blockchain systems which fail to exhibit
a native cryptocurrency.

66. Peters et al., ‘‘Trends in crypto-currencies,’’ 10.

67. Shivdeep Dhaliwal, ‘‘Beware: 4 typical Bitcoin scams in mining, investment, wallets, exchange,’’
The Cointelegraph, 24 March 2016, https://cointelegraph.com/news/beware-4-typical-bitcoin-
scams-in-mining-investment-wallets-exchange (accessed 8 October 2017).
68. Peters et al., ‘‘Trends in crypto-currencies,’’ 21–22.
69. Bank of Canada, ‘‘Briefing on Digital Currencies,’’ 2014, http://www.bankofcanada.ca/wp-con-
tent/uploads/2014/04/Senate_statement.pdf (accessed 8 October 2017), 4–5.
Ducas and Wilner 557

Financial stability considerations

The use of blockchain technologies poses several regulatory and policy consider-
ations regarding systemic financial stability. Due to the interoperability of legacy
financial systems, widespread acceptance of these technologies in any one area of
the financial sector could drastically affect a wide range of interconnected financial
markets and infrastructures, including payment systems, stock exchanges, central
securities depositories, securities settlement systems, trade repositories, and
others.70 The interdependence of existing financial systems suggests that issues
arising in any one area of the larger ecosystem could result in the transmission
of risk to other financial market infrastructures, leading to systemic damage at
national and even international scales. These risks are further enhanced given
the technological complexity of blockchain systems, including the use of strong
encryption, decentralized governance structures, and status as software. Should
widespread implementation of these systems occur, the International Monetary
Fund (IMF) warns, scenarios where blockchain technologies become simultan-
eously ‘‘too big to fail,’’ yet too complex to resolve, could potentially occur.71

Importance of standardization and international regulatory coordination

As distributed, decentralized networks, blockchain technologies—particularly
public permissionless systems—are inherently borderless. Capable of being both
hosted in multiple jurisdictions simultaneously, and of facilitating rapid cross-
border transactions, blockchain technologies are highly vulnerable to regulatory
arbitrage, whereby participatory nodes become concentrated in jurisdictions with
loose regulatory controls.72 Given the inefficiency of jurisdiction-specific regula-
tion, the effective mitigation of blockchain-related risks will ultimately require
international cooperation amongst relevant authorities, as well as the establishment
of universally acknowledged regulatory principles.

Regulatory sandbox model: A balanced approach to

blockchain regulation?
Developing a regulatory framework for entities and businesses employing block-
chain technologies in Canada’s financial sector will require a delicate approach.
Policies must be sensitive to the evolving needs of the community of innovators,
and strike an appropriate balance between addressing risks and abuses while avoid-
ing regulatory measures that stifle innovation altogether. Policies must likewise be
coordinated across a vast and complex network of regulatory authorities at the

70. IMF, ‘‘Virtual currencies,’’ 32.

71. Angela Walch, ‘‘The bitcoin blockchain as financial market infrastructure: A consideration of
operational risk,’’ New York University Journal of Legislation and Public Policy 18, no. 4 (2015):
837–893, 852; IMF, ‘‘Virtual currencies,’’ 33.
72. Peters et al., ‘‘Trends in crypto-currencies,’’ 23.
558 International Journal 72(4)

federal, provincial, territorial, and even international levels. As the pace of block-
chain and fintech innovation and application quickens, governments may no longer
be able to depend on top-down approaches to regulation, but will need instead to
be flexible and open to collaborative regulatory approaches involving the private
sector and civil society. States and jurisdictions agile enough to meet these chal-
lenges will be rewarded with economic growth in blockchain industries and pro-
tection from potential risks and threats.
To date, no single regulatory approach to blockchain technologies and crypto-
currencies has garnered widespread endorsement. While Russia, Thailand, and
China have attempted to institute a ‘‘restrictive’’ approach to these technologies
by banning or limiting cryptocurrency use, these efforts have been largely unsuc-
cessful or have been subsequently reversed.73 A majority of other jurisdictions,
including Canada, have assumed a ‘‘watchful’’ approach, whereby potential risks
and opportunities are carefully weighed against observable market activity. Still
other states have assumed a ‘‘facilitative’’ approach, choosing to actively regulate
blockchain technologies in order to both capitalize on potential opportunities that
emerge, while minimizing identified risks. States within this cluster are largely
regarded as fintech leaders.74
Facilitative approaches to fintech have largely emerged in the form of ‘‘regula-
tory sandboxes’’ in places like Australia, Singapore, Switzerland, Malaysia, Hong
Kong, Indonesia, Thailand, and the United Kingdom. As a regulatory approach,
laws and regulations are temporarily relaxed or suspended with respect to certain
business activities in order to facilitate innovative approaches to products, services,
and business models.75 Within the sandbox framework, businesses employing
innovative technologies provide services and products to a limited consumer base
within a pre-established threshold of limitations, insofar as they operate in a
responsible manner with regards to established AML/ATF, sanctions, privacy,
and consumer protection obligations. While the sandbox environment cannot
remove all risk, appropriate safeguards are implemented to contain the conse-
quences of any failure, maintaining the overall integrity of the larger financial
system.76

73. European Securities Market Authority, ‘‘Regulation and DLT,’’ 2; Guadamuz and Marsden,
‘‘Blockchains and bitcoin.’’
74. Patrick Armstrong, ‘‘Regulation and DLT: Working to Strike the Right Balance’’, European
Securities and Markets Authority, Speech, November 22, 2016, p.2 file:///C:/Users/AlexWilner/
Downloads/2016-1613.pdf.
75. Elena Mesropyan, ‘‘International FinTech regulatory sandbox launched by forward thinking
financial authorities,’’ Let’s Talk Payments, 3 November 2016; Ralph Atkins, ‘‘Switzerland eyes
Europe’s fintech crown with lower regulation,’’ Financial Times, 2 November 2016; Digital
Finance Institute, ‘‘Fintech in Canada,’’ 45; Financial Conduct Authority, ‘‘Regulatory
Sandbox,’’ Government of the United Kingdom, London, UK, 2015, https://www.fca.org.uk/
static/documents/regulatory-sandbox.pdf (accessed 8 October 2017), 1.
76. D. Arner, J. Barberis, and R. Buckley, ‘‘FinTech, RegTech and the reconceptualization of finan-
cial regulation,’’ Northwestern Journal of International Law and Business (forthcoming, October
2016), 45; Monetary Authority of Singapore, ‘‘FinTech Regulatory Sandbox Guidelines,’’ con-
sultation paper, 2016, http://www.mas.gov.sg/News-and-Publications/Consultation-Paper/2016/
Ducas and Wilner 559

The regulatory sandbox model provides a high degree of regulatory guidance

and clarity. Proponents suggest that it creates the requisite parameters in which
emerging fintech firms can reduce time-to-market at potentially lower costs, gain
better access to investor financing, and develop more innovative products.77 Firms
are also vigorously pre-vetted by regulatory entities before they are accepted into
the sandbox program. This makes participating firms strong candidates for part-
nership and investment, attractive to venture capitalists, investors, and established
financial institutions looking to acquire innovative competitors, which leads to
greater overall levels of investment in the wider economy.78 The sandbox model
also provides consumers with access to a range of products and services at lower
cost. Regulators, too, benefit. They are provided with an opportunity to interact
with market participants, acquiring a better understanding of the risks and oppor-
tunities associated with new business models. This early contact between innov-
ators and regulators creates further channels through which other developments
and initiatives can be shaped by regulators and other relevant authorities. For
instance, regulatory sandboxes provide venues in which regulators can ensure
that appropriate safeguards and compliance mechanisms are pre-emptively built
into new products, services, and business models prior to reaching the wider
market.79 Further, it is only at the end of the pre-defined sandbox period that
fintech participants are able to fully deploy their products or services at a broader
scale, provided they meet the objectives established by the process and have
demonstrated their ability to comply with relevant legal and regulatory
requirements.80
While regulatory sandboxes have only just begun to be implemented, several
initiatives have received global attention. Early signs of success are emerging from
the UK, a vibrant global leader in both fintech innovation and progressive
approaches to fintech regulation. In November 2016, two years after the launch
of the UK’s Financial Conduct Authority’s ‘‘Project Innovate’’—which aimed to
provide regulatory guidance to market participants and promote competition in
the interest of consumers through various initiatives, including the creation of a
regulatory sandbox program—twenty-four fintech firms were accepted into the
sandbox’s first cohort, including nine blockchain start-ups. This group is notable
for its international makeup.81 By employing a flexible approach to fintech, the UK
may secure early access to the most commercially viable blockchain initiatives.
The concept of a regulatory sandbox is not entirely new to Canada. In October
2016, the Ontario securities regulator, the Ontario Securities Commission (OSC),
announced that it was ‘‘prepared to be flexible with market regulations to help

Consultation-Paper-on-Fintech-Regulatory-Sandbox-Guidelines.aspx (accessed 9 October 2017),

2–5.
77. Financial Conduct Authority, ‘‘Regulatory Sandbox,’’ 5.
78. Arner et al., ‘‘FinTech, Regtech,’’ 46; Digital Finance Institute, ‘‘Fintech in Canada,’’ 45.
79. Financial Conduct Authority, ‘‘Regulatory Sandbox,’’ 5.
80. Monetary Authority of Singapore, ‘‘FinTech regulatory sandbox guidelines,’’ 8.
81. Financial Conduct Authority, ‘‘Financial conduct authority unveils successful sandbox firms on
the second anniversary of Project Innovate,’’ November 2016.
560 International Journal 72(4)

financial technology firms get to market.’’82 The OSC later entered into an agree-
ment with the Australian Securities and Investments Commission to provide
mutual support to fintech firms looking to enter both markets, signalling its inten-
tion to internationalize its approach to fintech and blockchain regulation.
Moreover, the Canadian Securities Administrators followed suit in February
2017 with the announcement of their own regulatory sandbox initiative.83 There
is no indication, however, that this initiative will engage the host of other provin-
cial, territorial, and federal regulators in Canada overseeing the activities of firms
employing blockchain technologies or other fintech innovations. This may well
limit the effectiveness of this initiative: only a partnership of all relevant regulators,
as well as fintech and blockchain market stakeholders, will sustain a robust sand-
box program.

Conclusion
The current wave of financial sector modernization driven by fintech innov-
ation—and blockchain technologies more specifically—has resulted in a period
of opportunity for consumers, the financial sector, and the Canadian economy.
Canadians now have access to a vast array of innovative financial products and
services that are convenient to use, cost-effective, and tailored to their needs. These
emerging technologies have offered incumbent financial institutions an opportunity
to replace existing financial infrastructure and seek larger profit margins through
technological modernization at the precise moment where they concurrently face
mounting international competition and regulatory scrutiny. New fintech firms
developing these technologies have caught the attention of innovators and inves-
tors alike, boosting the Canadian economy. And yet, emerging technologies also
threaten existing approaches to regulation, and empower groups and individ-
uals—including criminals and terrorists—seeking to skirt regulations for nefarious
purposes. More broadly, the effects of fintech and blockchain technologies on
deeply integrated and internationally interconnected financial and economic sys-
tems is not known or appreciated; uncertainty can lead to instability.
For policymakers, this dilemma is a pointed one. As the article illustrates, on the
one hand, the risks of failing to foster innovation through the development of a
coordinated national fintech regulatory framework are consequential: Canada risks
losing its competitive advantage in developing and profiting from blockchain tech-
nologies. Moreover, without defining the parameters within which both emerging
fintech firms and financial incumbents can innovate, risk-averse business practices
may become entrenched, increasing pressure on the strained profit margins of
Canada’s financial institutions. Some Canadian fintech start-ups and venture cap-
italists will relocate to more favourable regulatory jurisdictions in Asia and Europe.

82. Barbara Schecter, ‘‘OSC keeps closer eye on fintechs while giving them more freedom to get to
market,’’ Financial Post, 24 October 2016.
83. Autorité des Marchés Financiers, ‘‘The Canadian securities administrators launches a regulatory
sandbox initiative,’’ 23 February 2017.
Ducas and Wilner 561

On the other hand, establishing an under-regulated environment may encourage

criminality and undermine anti-money laundering and anti-terrorism efforts with
dire consequences in Canada and abroad. Public blockchains and the cryptocur-
rencies, digital black markets, encrypted verification processes, and the under-
ground communities they foster, may complicate and undercut law enforcement
and intelligence gathering processes with very serious consequences.
The solution may lie in pursuing a flexible, adaptive, and coordinated regulatory
approach. The nascent sandbox model, while still in its formative development, is
meant to provide vetted technology start-ups with a tractable regulatory environ-
ment in which they can innovate safely. This will help limit threats to public safety
and security, bolster existing financial systems, and provide regulators with a
degree of necessary oversight. Even then, however, best practices for the regulatory
sandbox have yet to be determined: fintech and regulatory leaders, like the UK,
have only just implemented this approach. Adaptive and responsive regulatory
leadership will be needed, providing states, governments, and regulators with the
ability to react appropriately to unforeseen events and consequences within and
beyond the sandbox itself. And from a Canadian perspective, seizing these oppor-
tunities will require Canada’s competing jurisdictions to find ways to cooperate
efficiently across all facets of the financial sector regulatory paradigm. A pan-
Canadian approach to the regulatory sandbox is the best, and perhaps only, way
to foster fintech and blockchain technologies in a way that meets the competing
demands of Canadians. Establishing such an expansive, cross-jurisdictional
approach will be a challenge all its own.
For scholars, the article suggests two areas for further research. In the first case,
more speculative research is needed in Canada on the influence blockchain tech-
nologies may have on the domestic economy, national security interests, and pol-
itical and governance structures. What comparative lessons from abroad
concerning the potential of blockchain technologies might Canada absorb at
home in formulating effective and well-balanced policies and regulations? Are
Canada’s existing bodies, agencies, and institutions able to address, with sufficient
speed, the opportunities and challenges blockchain presents? How will Canada’s
various levels of government, from the federal to the municipal level, cooperate on
and prioritize a collective response? How might a Canadian response to blockchain
be tailored to address larger, global trends? And what Canadian laws and norms
might need to be reviewed, tweaked, or re-written to accommodate blockchain
technologies while safeguarding against their negative effects?
The second area of research goes far beyond blockchain to encompass all forms
of emerging and disruptive technology. Research is needed to better understand the
ways that recent innovations in biology and gene editing technology (e.g. CRISPR/
Cas9), engineering (e.g. additive manufacturing; nano-technology; robotics), com-
puter science (e.g. machine learning; quantum computing), and digital space more
broadly, interact with public policy, national security, and defence planning. The
study of IR has only just begun to integrate technology into its theoretical folds.
Can existing paradigms, approaches, and theories of IR properly account for the
562 International Journal 72(4)

political and social change resulting from the development, implementation, and
proliferation of new technologies? How do we define emerging technologies as
disruptive, as they relate to society, national security, public safety, economics,
and governance? How are notions of power and coercion, diplomacy and state-
craft, and values and interests linked to emerging technologies? And finally, what
lessons can be culled from history (i.e. nuclear proliferation; the Space Race) to
provide us with contemporary guidance?

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research,
authorship, and/or publication of this article.

Funding
The author(s) received no financial support for the research, authorship, and/or
publication of this article.

Author Biographies
Evangeline Ducas is a recent graduate of the Masters of Arts in Public
Administration, School of Public Policy & Administration, Carleton University,
Canada.

Alex Wilner is an assistant professor at the Norman Paterson School of

International Affairs (NPSIA), Carleton University, Canada.