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Op-eds

Give the currency simple rules

Against some impressive odds — think the Mt. Gox fraud and the Chinese government crackdown — Bitcoin digital currency continues to grow in popularity and to attract more and more investment from the four corners of the globe. Given its tenacity, it is also increasingly capturing the attention of politicians.

For the time being, Canada is the second most popular destination for venture capital invested in Bitcoin companies, behind only the United States. This is good news, since this investment generates economic activity and jobs. And although the spread of Bitcoin use and the amount of Bitcoin investment remain relatively limited compared to other sectors of the economy, this could change in the future.

But certain conditions are necessary for the use of Bitcoin as a currency to really catch on. First of all, users need to receive concrete benefits from the use of this currency rather than some other one, a condition that is related to the nature of Bitcoin and its mechanics.

In addition to this, there are two conditions that depend on political decisions. Retailers, consumers and investors need to be able to count on the existence of clear rules indicating how Bitcoin is to be treated in terms of taxation and regulation. And those rules must not hamper the use of Bitcoin as a means of exchange, either with burdensome taxes or with excessive administrative rules for users.

In terms of taxation, Revenue Canada spoke to the issue when it declared that it considered bitcoins to be simple goods exchanged under a barter system. Retailers must declare the revenues from transactions when they accept Bitcoin as the method of payment, and if bitcoins are bought or sold for purposes of investment or speculation, any profits or losses would constitute capital gains or losses and be taxed as such.

As for regulation, in the February 2014 federal budget, the government announced its intention to introduce legislative amendments to strengthen Canada’s anti-money laundering and anti-terrorist financing regime in order to better address emerging risks, including those associated with virtual currencies. This spring, a representative of the Finance Department testified before the Standing Senate Committee on Banking, Trade and Commerce that legislative modifications could soon be adopted to regulate Bitcoin. These modifications could include Bitcoin exchanges in the definition of money services businesses, which would make them subject to money laundering laws.

This would help to clarify a crucial aspect of regulatory fuzziness affecting the interaction between banks and bitcoin companies. Currently, Canadian banks remain cautious in anticipation of more specific regulation, worried about running afoul of existing money laundering laws, among other things. Without basic banking services, many bitcoin companies will choose to set up shop elsewhere, leading to potential economic losses for Canada.

They might, for instance, head to Germany, which was one of the first countries to regulate Bitcoin and which became one of the first Bitcoin hubs, where the first partnership between a bank and a Bitcoin exchange emerged last year in order to provide banking services to the exchange’s clients. At the end of the year, the German Finance Department recognized bitcoins as a financial instrument similar to an international currency, which can be used to carry out private transactions or exchanged for other currencies, without being legal tender.

But it is not even necessary for Bitcoin to be officially recognized as a “currency,” much less as legal tender. What are needed are simple, straightforward rules for those who want to use Bitcoin as a currency and not just as a speculative investment vehicle. Moreover, these rules must remain flexible in order to respect the multiple uses of Bitcoin and its evolving nature.

David Descôteaux is associate researcher with the MEI and author of “How Should Bitcoin Be Regulated?” The views reflected in this op-ed are his own.

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