Money Service Businesses (MSBs) are an integral part of the financial sector, providing alternatives to traditional banking services such as money transfers, currency exchange, and cheque cashing. With the increasing adoption of digital currencies and online payment solutions, the scope of MSBs has broadened to include cryptocurrency transactions and other financial services.
The demand for MSB registrations in Canada is growing rapidly, with a projected 25% increase by mid-2024. This surge presents a lucrative opportunity for both local and international companies looking to establish or expand their operations in the Canadian market. However, successfully running an MSB comes with its own set of challenges, particularly in regulatory compliance and tax obligations.
Money Service Businesses cover a wide range of financial activities outside of traditional banking institutions. These typically include Money Transfers – Facilitating fund transfers between individuals and businesses, including cross-border transactions, Currency Exchange – Converting fiat and digital currencies, Cheque Cashing – Providing immediate access to funds from cheques for a fee, Issuing or Selling Money Orders – Offering alternative payment methods that are more secure than cash or personal cheques and Cryptocurrency Transactions – Engaging in buying, selling, or facilitating crypto-related transactions.
Registering an MSB with FINTRAC
To operate legally in Canada, an MSB must be registered with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). This registration is a requirement under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). However, it is important to note that FINTRAC registration does not grant the status of a licensed financial institution, which is subject to stricter regulatory scrutiny.
Setting up a Money Service Business in Canada involves two key steps:
- Business Incorporation – The MSB must be registered as a Canadian-incorporated entity, either federally or within a specific province.
- There is no requirement for directors or shareholders to be Canadian residents, but a registered business address in Canada is mandatory.
- Compliance with Know Your Customer (KYC) regulations requires the submission of certified identification documents, including a valid passport, details of the ultimate beneficial owner (UBO), and a certified non-criminal record.
- While FINTRAC does not explicitly require a physical office, maintaining a local address is recommended for regulatory purposes such as inspections and official communications.
FINTRAC Registration
Pre-Registration – Businesses must first submit basic information through an online form, including company details, compliance officer information, contact details (preferably Canadian), website, and the specific MSB services being offered. No KYC or Know Your Business (KYB) documents are needed at this stage. Upon review, FINTRAC issues credentials for full registration.
Full Registration – At this stage, businesses must provide detailed data, including banking details, ownership and senior management information, transaction volume estimates, business locations, and details of MSB agents. The completed registration form and required documents are submitted through Canada Post Connect as per FINTRAC’s instructions.
Due to a security breach on March 24, the FINTRAC portal was temporarily shut down, causing significant delays in the registration process. As a result, new registrations are currently taking between 3 to 6 months to complete.
To maintain FINTRAC registration, MSBs must implement a robust compliance program that includes A comprehensive Anti-Money Laundering (AML) and KYC policy that aligns with FINTRAC regulations, A structured risk assessment framework, procedures for record-keeping and monitoring high-risk transactions, with records maintained for a minimum of five years, A system for detecting and reporting suspicious activities and regular staff training on AML/KYC compliance and internal audits to ensure regulatory adherence.
While not mandatory, obtaining professional indemnity and business liability insurance is advisable to mitigate potential risks.
The Retail Payment Activities Act (RPAA)
The Retail Payment Activities Act (RPAA) is a recently introduced regulatory framework designed to oversee payment service providers (PSPs) such as digital wallets, remittance services, cryptocurrency exchanges, and payment processors. The regulation aims to improve security, transparency, and consumer protection in the payments sector.
Under the RPAA, PSPs must meet several compliance requirements, including:
Registration with the Bank of Canada.
Maintaining segregated accounts to protect client funds.
Securing insurance or guarantees.
Ensuring sufficient liquidity to cover operational risks.
Implementing a robust operational risk management strategy to address threats like fraud, cyberattacks, and system failures.
Non-compliance with the RPAA can result in severe consequences, including financial penalties, suspension of registration, and reputational damage.
Whether an MSB falls under the RPAA depends on its specific activities. If the business does not engage in custodial services, does not pre-set exchange rates, and does not directly process retail payments, it may not be classified as a PSP under the RPAA. However, given the evolving regulatory landscape, MSBs involved in crypto-related transactions should stay informed about potential changes in compliance requirements.
Registering a Money Service Business in Canada offers a gateway to the expanding financial services and cryptocurrency sectors. While the process involves regulatory hurdles, particularly with FINTRAC registration and compliance obligations, the opportunities for growth and market entry make it a worthwhile endeavor. Companies looking to establish an MSB should ensure they adhere to all legal requirements and consider seeking professional guidance to navigate the complexities of compliance and risk management.
Why Choose Clearsky Network?
When securing your Crypto license, Clearsky Network stands out due to its extensive experience and deep understanding of the Blockchain and Crypto regulations, ensuring a smooth licensing process. Beyond securing the license, Clearsky Network offers ongoing legal and regulatory support, communication management with local regulators, and other essential services to help grow your business.
Clearsky Network also provides a broad range of operational support, including opening and maintaining bank accounts, payment processing solutions, technology connections, and strategic consultations. Their industry experience and network make them an invaluable partner for businesses looking to establish and expand their operations under their Crypto license.
Looking to register as a Canadian MSB? Reach out to us today and let our experts guide you every step of the way
