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Crypto Assets

Crypto assets are a type of digital asset. They use cryptography, peer-to-peer networking, and a public ledger to create new crypto offerings, and verify and secure transactions without a middleman or bank.

Crypto assets often have one or more of the following properties:

  • A medium of exchange (similar to fiat currencies);
  • A function that is specific to the business or issuer; or
  • An ownership or profit interest in a business.

Crypto assets include cryptocurrencies, non-fungible tokens (NFTs), stablecoins, initial coin offerings (ICOs), and crypto funds like crypto exchange-traded funds (ETFs). These products are considered high-risk because of their speculative nature.

Many people use the term “cryptocurrencies” when referring to crypto assets. However, while many crypto assets are digital mediums of exchange (and therefore act similar to currencies), not everything that is referred to as a cryptocurrency is a digital medium of exchange, but could be a crypto asset with other properties.

Crypto assets only exist on the blockchain. The only way they can be accessed and used is by knowing the private key associated with the address the blockchain says is the owner of the assets.

When you buy crypto, you don’t download or hold them as a file on your own device – you hold the assets in a digital address on a blockchain. Wallets are technologies or products that help you manage the keys associated with your assets on the blockchain.

Your digital wallet comes with an assigned public key and a private key, which are comprised of a string of letters and numbers.

A blockchain exists as a digital ledger system that is distributed through a network of computers and manages the entire chain of custody of the crypto asset. Think of it as a digital accounting journal that’s replicated across multiple computers rather than stored in a single place. Blockchain transactions are viewable by the public using a blockchain explorer service.

Here’s how it works. Let’s say you purchase some Bitcoin:

  • Your transaction request to buy 5 Bitcoins is authenticated.
  • A block is created – it represents the 5 coins transaction.
  • That block is sent to a network of computers around the world.
  • People operating the computers validate your purchase.
  • Your transaction is complete – 5 Bitcoins go into your wallet.
  • The update is distributed across the network.
  • The block that represents your 5 coins gets added to the existing blockchain.
  • The person who successfully validates your purchase receives a reward (usually crypto assets).

The most common ways to buy crypto are through crypto asset trading platforms, initial coin offerings (ICOs), and kiosks.

Crypto trading platforms are newer firms that may not have controls to keep your money safe. Many exchanges are based outside of Canada, making it difficult to recover your money. That said, it’s a smarter decision to use platforms that are registered with Canadian securities regulators – they have legal obligations around safeguarding customers’ accounts. Still, if a platform ignores its obligations, your money could be in jeopardy.

You can see a current list of crypto trading platforms authorized to do business with Canadians here.

You can see a list of banned crypto trading platforms here.

ICOs are a way for companies to raise money using cryptocurrencies. To run an ICO, a company sells its own coins or tokens to the public. Often the issuer writes a white paper or article describing its plans and uses for the ICO’s proceeds.

These documents are not prospectuses, which are disclosure documents required by securities laws. For this reason, ICO documentation may not present all of the important details about the offering you should consider before making an investment.

You generally buy into an ICO with another cryptocurrency, such as Bitcoin or Ether. Sometimes ICOs allow purchases with a government-backed currency, like Canadian dollars.

In return, ICO issuers create digital coins that can have a range of uses. Sometimes the coins can only be used to purchase the company’s products and services. In other cases, the coins exist to hold value relative to other cryptocurrencies.

The function of the coin may be a factor used to determine if the coin is a security.

Some companies offer crypto for sale at a physical kiosk, often branded as an ATM (automated teller machine), which lets you insert cash in exchange for crypto assets. If you already have a public key, the kiosk can send your crypto to that public key; otherwise, the kiosk often can assign you new public and private keys and then print these keys off for you on a slip of paper.

Kiosks are not regulated. Before purchasing crypto at a kiosk, make sure you understand the fees you’re being charged. Keep any private keys you receive secure, and do not share them with anyone.

Some crypto assets incur trading fees and other charges. There is no standard for the level of fees charged to trade or own a crypto asset.

Not all crypto assets are liquid, meaning it may be difficult to sell your holdings for cash in a short amount of time. There may also be limits, holds, and transaction fees that are hard to know about before selling a crypto asset.

The speculative and volatile nature of crypto assets can cause returns to vary significantly. Crypto assets have the potential to lose large amounts of value in ways that may seem unpredictable or unlike other investments. Generally, investors earn a return through selling the crypto asset for more than the purchase price. Some crypto assets, like coins or cryptocurrency funds, may receive dividends or other distributions depending on the terms.

Crypto assets have a number of common and specific risks, depending on the asset.

Generally, there are liquidity, security, and volatility risks. Some crypto assets have no secondary market, which may make it hard to sell your holdings or track prices.

Crypto asset exchanges and trading platforms are often unregulated. Key investor protections may be missing from these trading platforms and exchanges, including secure handling of client funds, safekeeping of assets, protection of personal information, pre-trade disclosures, measures against market manipulations, and other harmful practices.

Changes in the crypto space are constant, and prices may change with little warning or news disclosed to investors.

The digital nature of this type of investment presents an international scope, which can challenge investors to get enough information, communicate with the issuer, or seek help from a securities regulator.

No crypto investment is guaranteed. You could lose all your money.

 

Crypto assetRisks
Cryptocurrencies
  • Some cryptocurrencies may not be a security and therefore may not be regulated by a securities regulator.
  • It can be hard to establish the value of a cryptocurrency because the value can change significantly in a short time period.
  • Liquidating your holdings may be difficult and costly
  • Some cryptocurrencies have a short track record to judge performance.
  • The exchange or trading platform used for transactions may not provide key investor protections or adequate security of your holdings.
NFTs
  • General misinformation and the hype surrounding NFTs can cause the values of tokenized assets to be inflated and volatile.
  • NFT generation is highly energy-intensive. Most NFTs are currently supported by the Ethereum blockchain, which uses an energy-intensive operating protocol called proof of work. A single NFT transaction requires as much electricity as the average home for about a day and a half.
  • You may need to own Ether. With most NFT sales occurring on the Ethereum platform, owning the blockchain’s native currency Ether is often necessary to purchase an NFT. Investors wishing to buy NFTs with fiat money like the Canadian dollar may have limited options.
ICOs
  • There may be no business plan or disclosure available to prospective buyers.
  • The coins or tokens may not be subject to securities regulations and investor protection laws.
  • The purpose of the ICO may never happen, thus the coins could be worthless. There may be no fundamental value behind the coin.
  • The value of the coin could be volatile.
Cryptocurrency funds
  • The price of the assets in the fund can be volatile.
  • The fund’s custodian may not have the right qualifications to ensure safekeeping of the fund’s assets.
  • Investors may not be covered by an investor protection fund or other insurance product.
  • The funds have a short track record compared to other types of investment funds.
  • It may be hard to trade units with other investors.
Stablecoins
  • By trusting a third-party to print money and keep a cryptocurrency stable, the dollars could be fractionally reserved instead of fully backed. In this case, the price of the coin can drop dramatically.
  • Accounts can be embezzled, blocked, or accessed by unauthorised third parties. Centralization risks mean the same monetary issues fiat currencies face when a central authority has the power to print money without oversight. This can potentially lead to hyperinflation.
  • As most decentralized stablecoins live within smart contracts in protocols like Ethereum or Stellar, there’s a risk the algorithm which keeps the currency stable fails. Algorithms could even be manipulated by a third party. Updates to the network can have an impact on previous smart contracts.
Blockchain companies
  • This asset class focuses on early-stage technology, so there may be a heightened risk that the business will fail.
  • If the company has issued an ICO to fund its operations, some of the risks of participating in an ICO also exist.

Crypto asset-related scams have increased in parallel with the rise in familiarity and popularity of crypto.

These scams often promise unrealistic returns with little or no risk to the investor. The goal is to make you feel afraid of missing out on an opportunity from which others are profiting. These types of scams are typically promoted online using social media and websites designed to look like legitimate/registered trading platforms or investment firms. People running these scams will often suggest they don’t need to comply with financial regulations in your province or country. They may also withhold funds and try to scam you by demanding payments for fake taxation, fees, or other charges.

Learn more about crypto scams.

Regulation helps protect investors because registered firms and individuals are subject to certain requirements including risk management, disclosure, and dealing honestly, fairly, and in good faith with clients. The regulatory framework around crypto and crypto trading platforms is developing and evolving.

Some crypto assets fall under BC’s securities law, while others may not. Crypto assets that are securities or derivatives and crypto-related products (like Bitcoin ETFs) and crypto trading services (like crypto asset trading platforms) may be regulated by provincial or territorial securities regulators if they are sold or marketed by or to Canadians.

Canadian securities regulators have issued guidance to assist companies and set expectations on the types of products and services that may be considered securities or require regulatory oversight. Guidance has also been provided on the requirement to be registered under securities laws for entities that offer crypto assets and crypto-related products.

While registration exists to provide investors with an added layer of security, just because a firm, trading platform, or individual is registered does not mean they are without risk. Always evaluate each opportunity and be sure you fully understand the asset and risks involved before you invest, purchase, or speculate in crypto assets.

Altcoin

Shorthand for alternative coin, meaning other crypto coins that are not Bitcoin.


Bitcoin

The most well-known crypto asset and the first to be mined in 2009.


Blockchain explorer

A browser that shows details of transactions on a blockchain network.


Blockchain funds

Funds that invest in companies that have operations related to blockchain technology. Blockchain funds allow investors to access the technology behind crypto assets without directly buying, owning, or trading crypto.


Cold wallet

An offline crypto wallet. Also known as cold storage. Generally, assets stored in a cold wallet are more secure than assets stored in a hot wallet.


Crypto asset

An umbrella term for all digital assets that use cryptography, a peer-to-peer network, and a digital ledger system to record transactions.


Crypto asset trading platform

An online trading service that allows investors to buy, sell, and in some cases, store crypto assets.


Crypto exchange-traded funds

A type of exchange-traded fund (ETF) that tracks crypto assets instead of stocks or bonds. These products are generally intended to enable investors to gain financial exposure to crypto assets without directly owning them.


Crypto miners

Operators of computers connected to a blockchain who validate crypto asset transactions. If they add the transaction to the blockchain, they receive new crypto assets or fees as a reward.


Cryptocurrency

Cryptocurrency, or digital currency, refers to digital assets whose properties vary depending on the cryptocurrency’s terms and features.


Cryptography

A method of protecting information and communications through the use of codes so that only those for whom the information is intended can read and process it.


Custodian

Provides storage of crypto assets for professional and institutional investors for a fee. Assets could be stored online (hot storage) or offline (cold storage) and may support a multi-approval approach (multi-signature wallets).


Decentralized finance (DeFi)

An umbrella term for peer-to-peer financial transactions on blockchains.


Distributed ledger

A system in which records of transactions are simultaneously maintained at multiple points through a network of computers. Blockchain is a type of distributed ledger.


Governance token

A crypto token that grants voting power to users on a blockchain or other crypto project. This means users may have the opportunity to determine future rules and goals of the project as well as influence changes to the blockchain architecture.


Hot wallet

A crypto wallet that is connected to the Internet. Also known as hot storage. Generally, assets stored in a hot wallet are less secure than assets stored in a cold wallet.


Initial coin offering (ICO)

ICOs are commonly used by companies to raise money through the sale of cryptocurrencies they have created. They are also referred to as ITO.


Initial token offering (ITO)

A company’s first sale of stock to the public.


Kiosk

A physical automated teller machine (ATM) that allows users to use cash to purchase crypto assets.


Non-fungible token (NFT)

A type of digital token that is, in theory, unique and cannot be traded for something truly identical. These tokens may represent certain property rights over a digital or real-world object such as art, music, or video.


Peer-to-peer (P2P) networking

A network that is created when two or more personal computers are connected and share resources without going through a separate server computer.


Private key

Every address on a blockchain has a private key and public key. The private key resembles a password and is used to access a personal account and to transfer crypto assets. Like any password, a private key is not meant to be shared.


Proof-of-stake

A system for adding validated transactions to a blockchain, in which a person is chosen to process a particular set of crypto asset transactions based on the amount of crypto assets they hold.


Proof-of-work

A system of adding validated transactions to a blockchain, which involves computers competing to solve math problems.


Public key

Every address on a blockchain has a public key and a private key. The public key is used to identify an account on the blockchain and transfer crypto assets to the account. Unlike a private key, a public key can be shared.


Public ledger

A record keeping system that maintains participants’ identities in secure and (pseudo-)anonymous form, their respective cryptocurrency balances, and a record book of all the genuine transactions executed between network participants.


Security token

A type of digital token used by businesses to raise money with some characteristics in common with traditional securities such as stocks or bonds.


Smart contract

A contract programmed to automatically execute once its terms are met. The contract information can be reviewed on the blockchain and can be used for agreements between individuals, companies, or platforms.


Stablecoin

A type of crypto asset meant to maintain a stable value relative to another asset such as fiat currency. Some claim to be backed by reserves of a single asset (such as the U.S. dollar, gold, or a basket of assets), though these claims are not always verifiable. Some are not backed by other assets at all and use mathematical algorithms to attempt to maintain a stable value.


Traditional finance (TradFi)

An umbrella term for traditional financial systems.


Utility token

A type of digital token that typically uses blockchain technology and has one or more specific function(s), such as allowing its holder to access or purchase services or assets.

Read about commonly asked questions and answers about crypto below. If you want to follow up on any of these questions, contact BCSC Contact Centre.

Should I invest with this crypto company or crypto fund? Are they registered?

The BCSC cannot recommend or give advice on investments.

If you’re going to buy crypto, it’s wise to use a registered crypto asset trading platform. In Canada, many platforms are currently not registered with securities regulators. It’s in your best interest to conduct a background check on any crypto asset trading platform, fund, or company that may be of interest to you. You can check to see if the platform you plan to use is registered by conducting a search on the Canadian Securities Administrators’ (CSA) National Registration Search. The CSA also maintains a current list of crypto trading platforms authorized to do business with Canadians. See the list here.

What crypto companies are registered in Canada?

The CSA maintains a current list of crypto trading platforms authorized to do business with Canadians. See the list here.

Do I need to pay tax on my cryptocurrency?

In general, possessing or holding a cryptocurrency is not taxable. But there could be tax consequences when you do any of the following:

  • Sell or make a gift of cryptocurrency.
  • Trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency.
  • Convert cryptocurrency to government-issued currency, such as Canadian dollars.
  • Use cryptocurrency to buy goods or services.

For more information on the tax treatment of cryptocurrency, check out the Government of Canada’s guide.

I lost money investing with crypto online. Can I recover my funds?

Crypto asset prices can be very volatile and can increase or decrease by small or large amounts many times during the day. No crypto asset investment is guaranteed, so there’s a very real possibility that you could lose all your money.

If you’ve lost your money through investing online with crypto assets, it’s unlikely you’ll be able to recover the lost funds.

If you’ve lost your money because of a potential investment fraud, contact the BCSC immediately. It’s important to understand though that some crypto assets fall under BC securities law, while others may not.

Crypto Quiz

Test Your Crypto Asset Knowledge.

i
This quiz is designed to introduce you to the basics of crypto assets. It is not intended to provide investment or financial advice, and should not be relied upon as a substitute for such advice.
1
QUESTION 1/10

Cryptocurrencies and blockchain are the same thing.