On June 19th, the standing Senate Committee on Banking, Trade and Commerce released a report on the use of digital currencies. The Report, entitled Digital Currency: You Can’t Flip this Coin follows 15 months of study during which the Committee heard from 55 witnesses. Last February, I was privileged to be one of the witnesses that appeared before the Committee. The Report contains eight recommendations for the government to consider with respect to digital currencies and the technology that supports them. With one exception, the Committee saw no urgent need to regulate with respect to digital currencies and, in fact, urged the government to take almost a “hands off” approach at this time. Some of the more interesting recommendations are discussed below.
More than a currency
In recommending that the government not rush to regulation, the Committee focused not just on the emergence of digital currencies but also on the other potential uses of the blockchain technology that underlies currencies such as Bitcoin. The Committee was concerned that introducing regulation at this early stage in its development could deprive Canadians of some of the important benefits of the technology, including its potential to enhance personal security. This potential, coupled with the limited inroads made by digital currencies, influenced the Committee’s call governmental restrain.
Money Laundering and Terrorist Financing
While urging restraint, the Committee did see one area where regulation should be developed. The Committee recommended that digital currency exchanges be required to meet the same requirements as money services businesses under Canada’s anti-money laundering and anti-terrorist financing legislation. The Committee considered these exchanges to be any business that allows customers to convert state-issued currency to digital currency and digital currencies to state-issued currency or other digital currencies.
In this regard, the Government has already made amendments to Canada’s anti-money laundering and anti-terrorist financing laws that will require persons that deal in virtual currency to register with the Financial Transactions and Reports Analysis Centre of Canada. The amendments are expected to be brought into force as soon as amendments to the related regulations are ready. These regulations may or may not further specify the activities that constitute “dealing in virtual currencies”. However, FINTRAC has indicated that the law is meant to apply to entities such as virtual currency exchanges. The amendments to the regulations have been expected for some time.
Access to banking
During its hearings, the Committee heard from various entrepreneurs that are trying to establish businesses that deal in or otherwise rely on digital currencies about the challenges they have encountered opening bank accounts and obtaining banking services. Of course, this links to the concerns that the banks have about the potential use of digital currencies as a vehicle for money laundering and terrorist financing and the fact that these businesses remain unregulated in Canada. In addition to recommending that the anti-money laundering and anti-terrorist financing regimes be extended to digital currency exchanges, the Committee recommended that the Minister of Finance convene a roundtable with stakeholders, including banks, to look for solutions to balance the needs of these businesses with the banks’ legitimate regulatory concerns.
The Committee heard testimony about the treatment of transactions in digital currencies under Canada’s tax laws and the interpretations of the Canada Revenue Agency. It was the Committee’s view that many questions remain. The Committee has therefore recommended that the CRA issue clear guidance on the tax obligations of Canadians when digital currencies are received as income, held as an investment, or used to purchase goods or services.
Back in three years
Given the Committee’s view that the use of digital currencies will evolve rapidly, the Committee indicated that it will review its study into the use of digital currencies and their associated technologies in three years to reassess the appropriateness of the regulatory environment.
For a copy of the full report of the Committee, click here.