In March of 2014, the Minister of Finance tasked the Standing Senate Committee on Banking, Trade and Commerce to examine the use of digital currencies. The Committee pursued an extensive fact-finding mission in Canada and in the United States, speaking with, amongst others, representatives from regulatory bodies, financial institutions, digital currency interest groups, law enforcement, and universities. The long-anticipated, 64-page report was published this month with a clear message: while there are steps to take to address the risks digital currencies could pose in money laundering, terrorist financing, and tax evasion, the federal government should tread carefully in developing regulations for digital currency so as not to restrict or stifle its use and development.
Specific Recommendations by the Senate Committee
After thorough research into the technology behind the platform, its risks and the current regulatory environment in Canada and the United States, the Committee made eight specific recommendations. The Committee recommended that the federal government:
- Take a “light regulatory touch – almost a hands off approach” with respect to digital currencies and their associated technology so as not to stifle further development;
- Consider employing the underlying blockchain technology for its own purposes of delivering government services and enhancing the security of private information;
- Regulate digital currency exchanges, other than businesses that solely provide wallet services, as money service businesses, to minimize the risks of money laundering and terrorist financing. In 2014, the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act was amended to extend the definition of “money services business” to persons “dealing in virtual currencies”. The regulations implementing these amendments have not yet been released and it will be interesting to see whether the scope of entities characterized as “dealing in virtual currencies” will exclude businesses solely providing wallet services, consistent with this recommendation;
- Continue to work with other countries to formulate a global approach for regulating digital currencies;
- Convene a stakeholder roundtable (including banks) to search for solutions to lack of access to banking services for digital currency related businesses that address risks relating to anti-money laundering and anti-terrorism;
- Provide concise information and educate the public about the risks of using digital currencies and using alternative payment systems;
- Provide concise information and educate the public about the tax obligations of digital currencies when received as income, held as an investment or used to purchase goods and services; and
- Review and renew this study of digital currencies to assess the appropriateness of the regulatory environment in three years.
The Senate Committee’s endorsement of a “light regulatory touch” stands in contrast with the approach taken by the New York Department of Financial Services, which recently issued its “BitLicense” regime heavily regulating the activities of businesses providing virtual currency services in the State of New York (read our post on the recent New York regulations here). In doing so, the Senate Committee has chosen to recognize the opportunities associated with digital currencies and digital currency technology (while still acknowledging that the associated risks must be addressed), thereby positioning Canada as a potential digital currency hub.