Fintech Business Models

The BC Securities Commission recognizes the evolving nature of financial technology (fintech) in BC, and has a long-standing tradition of developing regulatory solutions to support entrepreneurs and companies that are launching new ways of conducting business.

The business models explained below are examples of the types of fintech businesses that we regulate. If you have further questions on how your business fits within the current regulatory regime, please contact our Fintech and Innovation Team (FIT) using the details below or through our Contact Centre.

Robo-advisors

The term “robo-advising” (also known as "online advising") describes firms that provide online discretionary portfolio management. These firms are in the business of advising clients on the purchase and sale of investments. As a result, we require these firms to be registered as advisers.

The majority of robo-advisors are currently registered as portfolio managers. However, some robo-advisors are registered as investment dealers with the Canadian Investment Regulatory Organization (CIRO). Robo-advisors can select either mode of registration when operating their business.

There are several characteristics that are common among robo-advisors. They are:

• an online know-your-client questionnaire to collect client information,
• client communications by phone, text message, email or video chat, and
• using low-cost passive exchange traded funds or index mutual funds in client portfolios.

Additionally, robo-advisors may use artificial intelligence, including machine learning, in other ways to streamline or enhance their operations. Dependent on how these technologies are employed, their use may trigger securities law considerations.

Types of robo-advisors include:

1. Always Call: In the “always-call” model, the robo-advisors will call the prospective client during the account opening process to ensure that the information provided by clients is accurate, and to double-check that the portfolio recommendations made by the robo-advisor’s algorithm is in fact suitable for the client.
2. No Call: In the “no-call” model, the firm will only call the client if there is an issue or inconsistency in the information that the client provided in the online questionnaire.

In either model, the clients are always free to contact the online advisor if they want.

This Canadian Securities Administrators Staff Notice 31-342 discusses how securities laws apply to online advisors.

Online Lenders

Online lenders primarily use Internet-based platforms to assess the creditworthiness of potential borrowers, approve and advance loans, and administer those loans.

Online lenders have two main streams to their business:

• Loan-funding: This stream relates to how online lenders obtain the funds that they lend to borrowers.
• Lending: This stream relates to how online lenders lend money to borrowers.

Depending on how an online lender structures its loan-funding operations, that online lender may be in the business of trading, and may be required to register as a dealer or find an exemption from the dealer registration requirement that it can rely on. Additionally, the online lender will trigger the prospectus requirement if it is distributing securities to raise capital (including for loan-funding).

To get a better sense of whether you may be in the business of trading, please review Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations to national registration regime (in particular, see section 1.3 – Fundamental concepts).

Crowdfunding Portals

Crowdfunding is a process through which an individual or a business can raise small amounts of money from a large number of people, typically through the Internet. The objective is to raise sufficient funds in order to carry out a specific project. There are different types of crowdfunding, such as by donation, pre-selling of products, and securities crowdfunding.

Securities crowdfunding offerings are facilitated through a funding portal. A funding portal lists investment opportunities and facilitates the payment of the purchase price from the investor to the issuer. A securities crowdfunding portal operating in BC needs to be registered with the Commission because we view these types of activity as being in the business of trading. However, in certain circumstances, a person seeking to operate a securities crowdfunding portal in BC may rely on an exemption from the dealer registration requirement. As well, the company looking to raise capital using a securities crowdfunding offering may rely on an exemption from the crowdfunding prospectus requirement.

For more information on:

• the registration requirements and registration exemptions specifically related to start-up crowdfunding, take a look at our Guide for Funding Portals
• operating a crowdfunding portal using prospectus exemptions other than start-up crowdfunding, please contact us at fit@bcsc.bc.ca
• capital raising using the prospectus exemption related to start-up crowdfunding, take a look at our Guide for Businesses (conducting a securities crowdfunding offering)

Crypto Trading Platforms

Crypto trading primarily occurs through online trading platforms, some of which are commonly known as “cryptocurrency exchanges”. Crypto trading platforms may trigger securities laws both by how they trade, and also by what crypto assets the platform facilitates trading in. The fact that a platform is commonly known as an “exchange” does not mean that it is authorized under securities laws to operate as an exchange, and many online trading platforms today are not authorized under securities laws.

Crypto trading platforms that facilitate trades of securities or derivatives in Canada are required to be authorized by a provincial or territorial securities regulator. Depending on the platform’s business model, it may require authorization as one or more of a dealer, marketplace or clearing agency.

Registered Crypto Trading Platforms As part of its work to support innovation in the Canada’s financial markets, the Canadian Securities Administrators (CSA) have registered a number of crypto trading platforms. Registered platforms appear on the National Registration Search as well as the CSA website, along with links to the principal regulators’ decision, and/or terms of registration, as applicable. Unregistered Crypto Trading Platforms Crypto trading platforms operating in Canada while they pursue registration are expected to make commitments to their principal regulator in the form of a pre-registration undertaking (PRU), which includes terms and conditions consistent with requirements currently applicable to registered platforms. A copy of each crypto trading platform’s PRU is available on the CSA website.

Additional information on when a crypto-asset trading platform’s activities are subject to securities laws is found in CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.

Distributed Ledger Technology (DLT) and Blockchain

Many different fintech business models are utilizing DLT, including public or permissioned blockchains, in their operations. Securities laws may apply to such a business model, particularly if the business is operating as a marketplace participant or offering, trading, or advising in securities or derivatives. If you have an innovative business model that uses DLT and are seeking guidance on the application of securities laws to your model, please contact the Fintech and Innovation Team using the contact information at the bottom of this page.

Regulatory Technology

Regulatory technology, commonly known as “regtech”, applies to new technology developed to address regulatory requirements. Firms may use regtech to streamline operations and decrease compliance costs.

Dependent on how regtech is used to meet regulatory requirements, it may trigger securities law considerations. If you are a regtech provider and are seeking guidance on how securities laws may apply to you, please contact the Fintech and Innovation Team for further information.

Crypto-Asset Offerings

Crypto-asset offerings can provide new opportunities for businesses to raise capital and for purchasers to access a broader range of investments. In many cases, these offerings are structured as initial coin offerings (ICOs) or initial token offerings (ITOs).

Depending on the facts and circumstances of each crypto-asset offering, the coins or tokens that are offered or sold may be securities. Here are some of the factors we consider in making that determination:

• Is money being invested?
• Is the purchaser looking to profit?
• Do the profits come from the efforts of someone else, like the business issuing the coins?
• Putting aside the details of how the coin is structured, does it fundamentally look like an investment?

If the coins or tokens being sold are securities, then securities laws in BC will apply if the person or company selling the securities is conducting business from within BC or if there are BC investors.

Additional information on crypto-asset offerings is also in CSA Staff Notice 46-307 Cryptocurrency Offerings and CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens.

BCSC Fintech and Innovation Team (FIT)

Our Fintech and Innovation Team (FIT) can answer questions regarding regulatory issues related to your business. FIT actively engages in outreach to the BC fintech community, and is interested in hearing from businesses, stakeholders, and entrepreneurs.

You can email the team at fit@bcsc.bc.ca or contact us through BCSC Contact Centre at 604-899-6854 or 1-800-373-6393 (toll free).