How do cryptoassets work?

Although certain cryptoassets are used as a form of payment or means of exchange, they aren’t legal tender in Canada.

The Canadian dollar is the only legal tender in the country, although some types of transactions can be settled in another currency (e.g., the U.S. dollar) if both parties to the transaction agree to it.

The AMF reminds investors that transactions involving cryptoassets are not covered by deposit protection.

What are cryptoassets?

Cryptoassets are digital assetsIntangible assets whose value is based on supply and demand. that use cryptography (a method of securing data), a peer-to-peer networkA computer network where the computers are connected to one another directly, which means information is sent between them without going through a central server. and a digital distributed ledgerA distributed ledger uses stand-alone computers (referred to as “nodes”) to record, share and synchronize transactions. system to record transactions.

Bitcoin is the most important and best-known cryptoasset. 

  • Unlike currency that is legal tender, Bitcoin is not issued by a central bank or government
  • Bitcoin is generally exchanged when a transaction between two parties is added to the blockchainA secure, distributed database that stores transactions between users, from the date of its creation, in a chronologically ordered sequence of blocks that are linked together.
  • Trading on the blockchain is conducted without the involvement of an intermediary

There are many other types of cryptoassets, including Ether (Ethereum), XRP (Ripple) and Litecoin (Litecoin).

None are legal tender.

Stablecoin (value-referenced cryptoasset)

A stablecoin (value-referenced cryptoasset) is a digital asset that is designed to achieve greater value stability than other cryptoassets (e.g., Bitcoin or Ether). There are different types of stablecoins, including some that are pegged to the value of an asset such as a currency (e.g., the U.S. dollar) or to a basket of assets and that are backed by a reserve whose value, in many cases, is expressed in fiat currency (e.g., U.S. dollars). In principle, under certain conditions, an investor should be able to redeem this type of stablecoin for the asset it is pegged to. Other stablecoins use algorithms that trigger purchases and sales to keep their value stable. Like Bitcoin, stablecoins are not legal tender. 

Certain stablecoins have experienced sudden, steep declines in value, failing to deliver on their promise of stability. While they promise less volatility than other cryptoassets, stablecoins are still risky investments.
 

Public keys and private keys

A digital wallet used for the exchange and custody of cryptoassets is protected by two keys consisting of strings of letters and digits.

  • The first string, called the “public” key, is used to identify your account on the network and can be shared for the purpose of receiving cryptoassets. This key allows you to, among other things, verify the number of cryptoasset units stored in your account.
  • The second, called the “private” key, must be kept secret. It is like a secret code that allows you to perform transactions in your account. When you use a cryptoasset trading platform, the private key is held for you by the platform. You should know what safeguards the platform uses to keep your cryptoassets safe.
     
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Check whether the platform is registered with the AMF

A list of registered cryptoasset trading platforms is also available in the Registers section of the AMF website.

While its application for registration is being reviewed, a platform must enter into a pre-registration undertaking with the AMF in order to continue operating in Québec. The undertaking provides that the platform agrees to comply with terms and conditions that are intended to protect investors and generally consistent with current requirements for registered platforms.
 

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Blockchain technology

Blockchain is a decentralized information storage and transmission technology that operates without a central control body. Blockchain technology is primarily used in the field of cryptoassets: It records and updates the transactions of cryptoassets for all participants securely using cryptographic checks. 

A blockchain is similar to a digital accounting record or ledger that is replicated on a network of computers (nodes) rather than kept at a single location. In the context of a blockchain, a node is a computer that holds a copy of the blockchain and that maintains it through interactions with other users. Each node ensures compliance with the blockchain consensus rules required for system integrity. When a cryptoasset transaction is recorded on the blockchain, a peer-to-peer network validates the transaction and adds it to a list of pending transactions that forms a block.

A block is the digital equivalent of a page of an accounting record and cannot be altered. Once a block is complete, it is linked in chronological order to the previous block in the chain. This action is irreversible and visible to everyone on the system. Since a network of computers validates and maintains the blockchain, it is practically impossible to counterfeit the information that has been stored.

There are several types of blockchains, and some cryptoassets have their own protocols and rules for their blockchains. This is the case, for example, with Bitcoin and Ether, which use respectively the Bitcoin and Ethereum protocols referred to below. 
 

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Before investing through a platform, check the warning list of websites and companies carrying on potentially illegal high-risk activities in Québec. Investors doing business with a company appearing on the list may face significant losses.

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Initial cryptoasset or token offerings

An initial cryptoasset offering, commonly called an ITO (initial token offering) or ICO (initial coin offering), is a means of raising capital through the Internet, usually for the purpose of financing a technological project in the start-up stage of development. Investors are offered cryptoassets, or tokens, whose potential value and use are closely tied to the financed project’s success.

For more information, see the section on initial cryptoasset offerings.

Watch the video to understand the susceptibility of ICOs to volatility and fraud


Cryptoasset Exchange-Traded Funds (ETFs)

This type of ETF is designed to replicate the performance of a cryptoasset. The investors’ money is invested in cryptoassets or derivatives whose underlying asset is a cryptoasset. Like cryptoasset prices, the value of these ETFs can fluctuate significantly. Investing in these ETFs is very risky. There are no guarantees, and you may not recover your investment. Read the fund facts document carefully before investing and make sure you invest according to your investor profile.

Tax consequences

Using cryptoassets will have tax consequences for you if you:

  • use them to acquire goods or services
  • convert them to monetary currency
  • exchange them for another virtual currency
  • sell them or use them to make a donation

For more information, see the section of the Revenu Québec website You have to report your cryptocurrency transactions This link will open in a new window.

Risks associated with cryptoassets

The following are some of the risks of using cryptoassets.

Volatility risk

Media coverage of a cryptoasset can have a major impact on its value over a short period of time, without any body, such as a central bank, mitigating volatility. Different platforms may offer different prices for the same cryptoasset.

 

Liquidity risk

It can be difficult to trade a cryptoasset for money that is legal tender. Not all trading channels, such as platforms, are overseen by formal regulatory bodies or central banks. Speculative demand may increase bid-ask spreads.

 

Technological and operational risk

Cryptoassets are susceptible to hacking and theft.

The security of digital wallets and cryptoasset trading and transaction platforms is not guaranteed. Users risk having their assets stolen or losing them entirely.

Risk of participating in criminal, terrorist or fraudulent activities or money laundering

Cryptoassets have sometimes been associated with fraud, money laundering, and criminal or terrorist activities.