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Securities regulator grapples with fintech innovations

Complications arise when new finance technology meets current securities regulations
CEO DH Kim’s company, Vancouver-based Finhaven Capital Inc., has been helped by the Canadian Securities Administrators (CSA) Regulatory Sandbox |  Chung Chow

It’s been two years since DH Kim began making inquiries to securities regulators across Canada, trying to find out how he could develop a digital platform that would connect accredited investors with capital-seeking companies without running afoul of the law.

“The current regulatory framework may not give an opportunity to create new innovations in capital markets,” said the CEO of Vancouver-based Finhaven Capital Inc. “So there are some exceptional leaps that the Canadian securities regulators provide to these fintech companies so that they can try new things in Canada.”

In Finhaven’s case, it was granted relief last month through the Canadian Securities Administrators (CSA) Regulatory Sandbox, which allows fintechs to obtain certain exemptions to securities laws.

That green light has allowed Finhaven to launch a new type of marketplace in six provinces, using blockchain-backed technology that allows accredited investors to invest in digital securities from private companies vetted by Finhaven.

Kim said the relief granted by Canada’s regulatory sandbox is now giving way to “exclusive deals” that would not have been practical otherwise.

For regulators, such exemptions have become necessary as the country tries to balance competition in the capital markets amid advances in technology with the duty to protect investors.

As securities legislation is the domain of provinces, companies are referred through relevant provincial regulators to the CSA’s Sandbox for national consideration, but the relief is ultimately granted at the provincial level.

That falls to the BC Securities Commission (BCSC) in cases dealing with Vancouver-based fintech companies or else financial companies moving into the realm of fintech.

The BCSC itself launched its own Fintech and Innovation Team (FIT) in early 2017 to handle the increasing number of inquiries coming in from tech entrepreneurs tapping new innovations like blockchain and moving into the domain of finance.

“The challenge out of the gate for securities regulators was just making sure that we had a complete understanding of the technology, and how it works and the risk, so that we could appropriately come to the right landing point on balancing investor protection and efficient capital markets,” said Mark Wang, the BCSC’s director of capital markets regulation.

While the FIT team has been offering guidance to fintech companies to ensure they don’t violate regulations, they’ve also been engaging with B.C. businesses proactively to ensure technology being developed does not land them in hot water with regulators.

While COVID-19 has disrupted some of that outreach, regulators have also been pursuing virtual events to get the word out.

And as tech entrepreneurs reach out to the BCSC to ensure they’re not running afoul of securities legislation or to get relief through the regulatory sandbox, FIT has been going to fintech experts and tapping consultants for evaluations of technology or asking for demonstrations of fintech platforms to gain a better understanding of the technology.

“I have no hesitation in going out to a particular industry stakeholder, sounding dumb and asking very dumb questions if that helps us as a regulator to understand exactly what’s happening with a particular innovation or particular business model,” said Zach Masum, manager of legal services at the BCSC’s division of capital markets regulation.

“One of the things that we’ve done here at BCSC over the last few years is that we’ve really developed some good in-house expertise with respect to the different types of fintech that we’re seeing.”

This year the regulator also launched a 17-member advisory forum composed of industry experts to advise FIT on trends, risks and securities laws affecting fintech.

“There’s been a much better awareness of the fact that many of these [business] models incorporate securities law considerations. Part of that is just the continuing evolution and maturity of the fintech industry as a whole. I think it’s matured quite a bit in simply the last three-and-a-half years,” Masum said. “So just the fact that something is in a sandbox does not mean that there is lighter investor protection, necessarily, and that’s definitely not the case with the way our sandbox is structured now in Canada.” •