Crypto Assets and Cryptocurrencies

What are crypto assets? 

Crypto assets are purely digital assets that use online public ledgers to verify ownership. It uses encryption, peer-to-peer networks, and distributed ledger technology such as blockchain to create, verify, and secure transactions. They can have various functions and properties: they can be used as a means of exchange; a way of storing valuables; or for other commercial purposes. Crypto assets, as a rule, operate independently of the central bank, central authority or government.

A distributed registry is a kind of database in which electronic records are stored, which are shared, duplicated on many sites and maintained by members of this decentralized network. Each new transaction must be approved by all network participants before it is added to the registry. Blockchain is one of the types of distributed registry that combines data into blocks and chains. This unique way of structuring data gives blockchain transactions additional security, since they are irreversible. Blockchains can be used to store many types of data, but have recently become popular for storing records of transactions with cryptocurrency. 

Some of the m
ost common types of crypto assets that you may encounter are the following: 

Cryptocurrency

Auxiliary characters 

Security Codes 

Irremovable tokens

Cryptocurrency

Cryptocurrency (or virtual currency) is probably the most popular type of crypto asset. Cryptocurrency is a digital currency or medium of exchange. It can be used: 

To exchange goods or services, such as fiat currency (for example, Canadian dollars or US dollars) 

For speculative purposes, such as trading on a crypto asset trading platform 

As a means of preserving value 

It was created as an alternative to fiat money, but cryptocurrency is not considered legal tender in Canada. Cryptocurrencies have no intrinsic value; their perceived value largely depends on supply and demand in the market. Examples are Bitcoin, Ether, Ripple and Litecoin.   

Cryptocurrencies are generally not considered securities and, therefore, are generally not subject to securities laws. For example, when you buy a cryptocurrency and immediately transfer the crypto asset to your digital wallet, such a transaction is usually not subject to securities laws. However, if you trade cryptocurrencies on CTP, and CTP stores your cryptocurrency in a digital wallet for you on its platform, this creates a permanent contract based on the value of the underlying crypto asset, and this contract is subject to securities regulation. Money transfer programs that provide this service to users must be registered with the relevant securities authority(s). You can check the CTP registration using a free national registration search from Canadian securities administrators.

There may be some circumstances in which a cryptocurrency is considered a guarantee. This may need to be determined on a case-by-case basis by studying a specific situation, scenario, or characteristics of the cryptocurrency. As technology and regulation in this area are evolving, if you are not sure whether securities laws apply to the cryptocurrency you are considering, contact your specialist.

The use of cryptocurrencies to generate income, capital gains, or pay for goods or services entails tax consequences. You should refer to the TRA guide for cryptocurrency users and tax professionals to make sure you understand how to comply with your taxes.

Auxiliary characters

A service token uses a distributed ledger or blockchain platform to grant access rights to a specific product or service (potentially one that is still under development) or to use it to purchase certain products or services. A product or service provider usually issues tokens that can only be used on the issuer's network. 

Security Codes

Security tokens are often sold or auctioned at the initial coin offering (ICO) or initial token offering (Ito), which allows companies to raise funds to finance an idea or business model. The company offers security tokens in exchange for fiat money or other crypto assets. A security token often comes with a stake in a project and additional benefits, such as voting rights, profit sharing or dividends. However, the project may not succeed, and investors should remember that they invest their money in supporting the idea of a business model, and not a fully implemented product or service.

Irremovable tokens

Irrevocable tokens are tokens that are located in a distributed ledger or blockchain that record ownership of a unique tangible or intangible object – such as a song, digital photo, video, designer clothing, etc. Irremovable means that these tokens cannot be exchanged for each other; each of them is unique. Interchangeable tokens are relatively new even for crypto assets, and the regulatory scheme and the market for interchangeable tokens are developing rapidly. 

Purchase, sale and storage of crypto assets

Initial Coin Offerings

Security tokens can be sold or auctioned at the initial coin offering (ICO) or initial token offering (ito). These "token generation events" are used to raise funds for an idea or business model. Interested supporters can buy tokens for ordinary currency or other cryptocurrency. It is possible that the token has no value at the time of its purchase, but in the future it can be exchanged for the launch of a new cryptocurrency by the project, a discount or early rights to a product or service offered by the project. Since there are no guarantees or certainty that the token will have any future value or that the project will be successful, investors should be very careful when buying an ICO. The level of disclosure and available information is usually much lower than that available for a typical investment opportunity. Investors should be prepared to lose some or all of their initial investment. 

Depending on the conditions of the ICO, tokens can be securities. If so, they may be subject to the Securities Act. If you are unsure whether securities laws apply to ICOs or tokens that you are considering, contact VNC.  

ICOs are considered high-risk, and their structure makes them a breeding ground for fraud and abuse. Anyone thinking of participating in an ICO or other token-generating event should be wary of promises of guaranteed profits, stolen or forged investment documents, contracts or website content, fake or missing information about the company's business and management. If you are considering participating in an ICO or are not sure about the validity of the ICO you are considering, we recommend that you seek professional advice or a second opinion.