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  • Introduction
    • On 25 March 2014, the Senate authorized the Standing Senate Committee on Banking, Trade, and Commerce (the Committee) to study digital currencies, with a particular focus on the potential risks, threats, and advantages of these electronic forms of exchange. The Committee’s interest in the topic was partially motivated by media reports about bitcoin being used to make and receive payments over the Internet, and comments by witnesses during our recent statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act about trends in the use of the Internet to launder money.
    • While the focus of the Committee’s study was “digital currencies” in general, it was specifically about cryptocurrencies, which are digital currencies that rely on encryption; in particular, their focus was often Bitcoin.


  • Digital Currency
    • Elements of the “digital currency sector” – the currencies, the technologies, and the businesses – are constantly evolving, and the terms used when discussing the sector are often unclear.
    • the Committee supports the Department of Finance view that a digital currency is defined by four key characteristics:
      • Its value can be held and exchanged without the use of banknotes or coins.
      • It is not the official currency of a country.
      • It has the intended purpose of being exchanged for real or virtual goods and services.
      • Its units can be transferred between individuals, between businesses, and between individuals and businesses.
    • Cryptocurrencies protect their technology from cyber-attacks and counterfeiting attempts through both encryption and a decentralized network called the public ledger.
    • In the Committee’s view, Bitcoin’s blockchain – or public ledger – technology is extremely innovative and has the potential to be used in a growing number of applications, including as a registry to record such events as marriages and real estate purchases, and in the context of “smart contracts” that can be executed by a computer.
    • the Committee agrees with witnesses that – at present – digital currencies have three main roles in Canada:
      • a form of money;
      • a commodity; and
      • a payments system.
    • During the study, the Committee learned that the emergence of digital currencies has led to a range of opportunities and that Canada could become a global hub for the digital currency sector if the legislative and regulatory environment is conducive to innovation.
    • Blockchain technologies that facilitate identity protection can benefit Canadians, as governments seek to protect the information they hold on behalf of its citizens.
    • The Committee recognizes that, in recent years, a significant number of hackers have targeted government databases, including those at the Canada Revenue Agency, in an attempt to steal identities and other personal information. In our view, compared to centralized databases, blockchain technology may provide a more secure way to manage information, as it does not rely on security software developed by third parties.


Digital Currency-Related risks

  • Use of Digital Currencies to Launder Money and Finance Terrorist Activities
        • In the Committee’s view, potential criminality is perhaps the greatest challenge to be managed.
        • The Committee understands that digital currencies can be attractive to criminals who want to launder money, finance terrorism or perpetrate other crimes.
        • In the Committee’s view, coordinated international efforts are a particular priority to effectively counter the international nature of criminal activities and to prevent “jurisdiction shopping” by digital currency-related businesses.
  • Protecting the Users of Digital Currencies
      • The Committee believes that any loss of funds – whether through cyber-theft, 16 bankruptcy or price volatility – is regrettable for financial services providers and their customers.
      • The Committee has come to appreciate the importance of the digital currency sector being aware of any weaknesses in their technologies and systems, and of taking appropriate efforts to protect against cyber-attacks.
      • The Committee believes that providing the public with specific and comprehensive guidance about the taxation rules for digital currencies – whether received as business or employment income, held as an investment, or used to buy goods and services – would assist individuals and businesses in understanding the rationale for these rules and in complying with them.
  • Focusing on the Future
      • The Committee understands that, as can be seen with other new technologies in the payments sector, the technology associated with digital currencies is dynamic and evolving rapidly; thus, the opportunities and challenges identified in this report may no longer be applicable in just a few years.


Digital Currency Types and Uses

    • According to the Department of Finance, there is no universally agreed upon definition for the term; it may include electronic forms of state-issued currency, such as prepaid access cards and wire transfers. Similarly, the Bank of Canada stated that the term may include online credit card transactions, Interac transactions sent by email, online bill payments and the cashing of cheques with a smart phone’s camera.
    • The Department of Finance said that it considers a digital currency to have four characteristics:
      • its value can be held and exchanged without the use of banknotes or coins;
      • it is not the official currency of a country;
      • it has the intended purpose of being exchanged for real or virtual goods and services; and
      • its units can be transferred between individuals, between businesses, and between individuals and businesses.
    • The Department of Finance indicated that digital currency can be classified in relation to its convertibility: a “convertible” digital currency can be converted to a state-issued currency, while a “non-convertible” digital currency can be used only to purchase real or virtual goods and services from particular retailers. It suggested that convertible digital currencies should be the primary focus for possible regulation.
    • The Bank of Canada and the Department of Finance identified a classification method that focuses on whether a particular digital currency is “centralized” or “decentralized.” According to the Bank, a centralized digital currency can be used to purchase a variety of goods and services and is issued – and often managed – by a central authority that typically has a corresponding debt for the amount of digital currency that it has issued.
    • The Committee identified the various ways that digital currencies are being used in Canada and generally commented on three roles: a form of money; a commodity; and a payments system. They also discussed other potential uses for digital currencies.
  • A Form of Money
          • According to the Department of Finance, if digital currencies become both a stable store of value and generally accepted as a means of payment for goods and services, they could become more widely used as money. That said, it noted that long-term use of digital currencies as a form of money would be unlikely, partially due to volatility in the price of digital currencies, as has occurred with bitcoin.
  • A Commodity
          • Joshua Gans indicated that a number of holders of bitcoin are not exchanging their bitcoin for goods and services; instead, they are retaining their bitcoin, which will be beneficial if the price of bitcoin rises.
          • According to the Department of Finance, it is too early to determine whether digital currencies will be successful as a commodity, as any value they might have in this regard is linked to their use as a currency. Bitcoin Foundation Canada suggested that, although bitcoin is likely not security, it can be used as the unit of account for a securities transaction, such as an investment fund denominated in bitcoin.
  • A Payments System
        • The Department of Finance and the Canadian Payments Association stated that because of Bitcoin’s framework, it is like a payments system.
        • The Canadian Bankers Association indicated that Canada’s banks support the creation of new ways for consumers and merchants to engage in e-commerce, and noted that banks are involved in promoting new payments technologies, such as near field communication (NFC) for contactless payment cards and mobile wallets on cell phones.
  • Other Potential Uses
        • According to the Bitcoin Embassy, digital currencies are not simply another payments system to be studied within the traditional framework for financial services, and nor are they a new form of money that can be examined like a foreign currency or a commodity; rather, they could be viewed as a new technology that is replacing their obsolete predecessors.
        • Andreas Antonopoulos said that Bitcoin’s technology in relation to its public ledger is being used to record events, such as the purchase of automobiles, company shares and real estate, as well as marriages. The Bill and Melinda Gates Foundation suggested that this technology could be used to develop title registries for land and other types of assets, from which low-income people would benefit.



  • The Technology and Payments System
      • According to the Department of Finance and the Bank of Canada, the term “Bitcoin” generally describes the decentralized, cryptographic network that functions as the payments system for “bitcoin,” which is the digital currency
      • The Department of Finance noted that Bitcoin transactions are recorded on a public ledger that can be accessed on a website, and that “miners” undertake a “mining” process to verify the availability of funds for a transaction. According to it, the miners’ computers solve mathematical problems to ensure that each bitcoin’s private key, which is like a personal identification number, is authentic; once the mathematical problem is solved, the transaction is verified and recorded on the public ledger.
  • The Currency
      • The Department of Finance stated that a bitcoin is not a file, but rather a number associated with a Bitcoin address, which functions like a bank account.
      • According to Jeremy Clark, bitcoin is not a bearer instrument and cannot be held physically; rather, an individual obtains a cryptographic – or private – a key that gives him/her “signing authority” for the Bitcoin address.
      • The Bitcoin Strategy Group said that, in addition to mining, bitcoin can be obtained in three ways, with the price of a bitcoin perhaps being different in each case: directly from a holder of bitcoin; through a bitcoin exchange; or from a bitcoin ATM.


Related Opportunities

  • Innovation
      • Possible impacts of Regulation:
        • The Committee commented that regulations for digital currencies could negatively affect innovation in relation to them and their technologies.
        • The Department of Finance noted that digital currencies may not be extensively regulated in Canada in the future, as doing so could constrain these currencies’ innovative aspects, while Jeremy Clark and Joshua Gans indicated that any federal regulations for these currencies should be implemented in a way that would encourage innovation.
      • Canada as a Global Digital Currency Hub:
        • The Bitcoin Embassy stated that Canada has the potential to become a global hub for these businesses, as it has a high rate of Internet usage, a skilled workforce that is knowledgeable about technology, competitive electricity rates, and “organized” Bitcoin meetings and groups in almost every major Canadian city.
        • Bitcoin Foundation Canada suggested that Canada could play a lead role in digital currency mining if it maintains a fiscal and regulatory framework that is technologically neutral in relation to digital currencies.
      • State Supported Digital Currency:
        • Joshua Gans said that a state-issued digital currency in Canada should be considered, while Andreas Antonopoulos indicated that central banks may use Bitcoin’s blockchain technology to develop a state-issued digital currency.
        • Regarding its development of a digital currency, the Bank of Canada stated that innovation with respect to digital currencies and payments system technologies is best provided by the private sector, which should be guided by an appropriate legal framework.
  • Transaction Costs
      • Individuals:
        • Witnesses highlighted that digital currencies reduce the need for intermediaries in the payments system, which enables lower costs.
        • Joshua Gans mentioned that digital currencies – such as bitcoin – reduce the need for governments, banks and other financial institutions to be involved in transactions. In his opinion, the lack of such intermediaries results in lower costs for certain types of transactions, especially those that are international.
        • The Department of Finance suggested that peer-to-peer transfers of digital currencies may be an attractive and cost-effective mechanism for individuals to send international remittances; these transfers can be less costly than those that involve banks or money services businesses and do not require a currency exchange
      • Businesses:
        • Witnesses said that digital currencies and their technologies may reduce transaction costs for businesses. For example, the Department of Finance and the Bank of Canada indicated that digital currencies’ transaction fees are low in comparison to credit card acceptance fees.
  • Payment Options
      • It was highlighted that digital currencies can lead some individuals to have access, or enhanced access, to financial services.
      • Andreas Antonopoulos indicated that individuals who lack access to financial services or international credit have the greatest need for Bitcoin; some of these individuals – many of whom live in Kenya, Lagos, Nigeria, and other African countries – use their mobile phone extensively.
      • The Bill and Melinda Gates Foundation mentioned that the least expensive way to improve financial inclusion in developing countries is through digital products, including mobile phone-based payments systems.
      • Witnesses identified a number of unique characteristics of digital currencies and their payments systems from which businesses could benefit. For example, BitPay and MasterCard highlighted the ability to transfer an asset – such as bitcoin – and immediately settle a transaction with no counterparty risk. According to the Bill and Melinda Gates Foundation, the instantaneous clearing and settlement of small-value payments that is a feature of the mobile-phone based payments systems used in developing countries could benefit developed countries.
  • Identity Protection and Recording of Transactions
      • In the opinion of the Bank of Canada, the anonymity associated with digital currencies may be useful to individuals who wish to conduct specific types of transactions; for example, someone may want to undertake a transaction with an individual who is unknown to him/her without divulging personal information, such as a bank account or credit card number. The Royal Canadian Mounted Police noted that legitimate users of digital currencies can benefit from increased privacy.
      • The Department of Finance stated that Bitcoin is one of the most transparent payments systems because transactions are recorded on the public ledger and any emails associated with Bitcoin addresses are traceable. That said, it explained that a Bitcoin address is a series of letters and numbers; consequently, the entity associated with a particular address may be unknown, which gives rise to the notion that Bitcoin is pseudo-anonymous.
      • The Department of Finance suggested that Bitcoin’s public ledger generally makes transactions using bitcoin more transparent than those with most other methods of payment, while Jeremy Clark indicated that an individual using bitcoin is more anonymous than someone using a debit or credit card; both said that Bitcoin transactions are more transparent than transactions with cash.


Digital Currency – Related Risks

  • Potential Criminality and its Effects
      • Witnesses told the Committee that certain digital currencies have been linked to criminal activities, particularly money laundering and terrorist financing and that some regulators have implemented – or are considering the implementation of – licensing requirements as a way to deter criminals from operating digital currency-related businesses and using digital currencies for criminal purposes.
      • According to the Department of Finance, Canadians were making purchases on the Silk Road website (Later shut down by the U.S. Federal Bureau of Investigation) and Canada was the fourth most common country of origin for illicit items listed on the website, after the United States, the United Kingdom, and the Netherlands.
      • The Department of Finance, the Financial Transactions and Reports Analysis Centre of Canada, l’Autorité des marchés financiers and the Ontario Securities Commission stated that the anonymity provided by digital currencies and the ease they can be used to make transfers make them vulnerable to being used for money laundering and terrorist financing activities.
      • The Royal Bank of Canada said that difficulties arise when attempting to trace the source of funds when payments are made using bitcoin; bitcoin exchanges cannot be properly monitored to ensure the absence of money laundering and terrorist financing.
      • The Canadian Security Intelligence Service said that it is not overly concerned about digital currencies or online payments systems being threats to national security, perhaps because of high volatility in the price of digital currencies and relative difficulty in using such currencies to make payments, particularly when traveling. It stated digital currencies have not been found to fund or facilitate threats to Canada or other countries in any substantial way, but they could be used by terrorists in the future.
      • According to the Royal Canadian Mounted Police, regulations for digital currencies should be designed with a view to deterring crimes that involve these currencies and reducing the use of these currencies by organized crime groups, particularly to transfer funds internationally and to launder money.
      • In addition to laundering money and financing terrorist activities, criminals use digital currencies to commit other types of crimes. According to the Royal Canadian Mounted Police, digital currencies are a real and evolving threat to Canada’s economic integrity, as criminals exploit any new technology that provides anonymity and unregulated movement of funds.
      • The Digital Finance Institute suggested that the use of bitcoin could facilitate corruption. It provided the example of China, where bitcoin is a preferred method of payment when accepting a bribe, as the digital currency can be moved out of the country easily and anonymously.
  • Licensing of Digital Currency Exchanges and Automated Teller Machines
        • It is pointed out that, to obtain a license, a digital currency ATM operator must provide specific information about its business; this information is submitted to the Sureté du Québec and local police forces, which undertake certain investigations and make a recommendation about the granting of a license. In its view, this process is designed to ensure the integrity of businesses operating digital currency ATMs and to prevent money laundering.
        • Elliot Greenstone suggested that Quebec’s regulations for bitcoin ATMs should achieve two goals: minimize the extent to which the public associates these ATMs with money laundering and terrorist financing activities; and encourage people to obtain bitcoin from legitimate sources, rather than anonymously from strangers in exchange for cash.
  • Access to Banking Services
      • Some witnesses highlighted that the lack of regulations for digital currencies, particularly in relation to domestic and international anti-money laundering and anti-terrorist financing, has led some businesses to have difficulties in accessing banking services; in certain cases, existing banking relationships have been ended.



  • Taxation as Business or Employment Income
        • The Canada Revenue Agency considers digital currencies to be property or a commodity for purposes of taxation; consequently, the taxation rules for barter transactions apply. The Canada Revenue Agency explained that when digital currencies are accepted as a method of payment in exchange for goods or services, they are taxable if earned through a “business.”
        • It also indicated that when a business is registered for purposes of the Goods and Services Tax, that tax should be applied on a transaction if a digital currency is the method of payment. The Canada Revenue Agency also said that, because it is treating digital currencies as commodities, no new rules should be required in the Income Tax Act to address the use of such currencies when they are earned as income or used as an investment.
  • Taxation as an Investment
      • The purchase and sale of digital currencies are treated in the same manner as the purchase and sale of such commodities as copper: 50{b3027e93fdf69f90e2c3f13a13b04d4c1faf6d34e0524b0fd27ff4869a50482b} of the capital gains resulting from the sale is included as income and, in the case of capital losses, 50{b3027e93fdf69f90e2c3f13a13b04d4c1faf6d34e0524b0fd27ff4869a50482b} of the losses are deductible against any capital gains. As well, it was explained that the capital gains tax rules apply when bitcoin is considered to be personal property.
  • Access to Information and Protection for Users
    • Due to a lack of information, users of digital currencies are not well informed about the challenges with these currencies or their associated technologies and businesses. For example, according to the Bank of Canada, consumers may not have sufficient information about a new digital currency or digital currency-related business, especially about the terms and conditions of any contracts, service fees or dispute-settlement procedures that can be used when a contract is violated.
    • The Bank of Canada identified a need for consumer education, as the media give the impression that bitcoin is a coin. In its opinion, people should know that bitcoin is not a Canadian currency and that the Canada Deposit Insurance Corporation does not protect bitcoin holdings.
    • Witnesses indicated that users of digital currencies and users of traditional banking services do not have the same types of protections. The Royal Bank of Canada suggested that protection when using digital currencies and other types of unregulated payments systems is lacking.
    • According to MasterCard, procedures to resolve unauthorized transactions that occur with digital currencies are inadequate. Visa Canada Corporation said that digital currencies do not provide consumers and merchants with the same types of protection as those with credit cards; the latter offer zero liability for cardholders in the case of unauthorized use of the card and guaranteed payment for merchants.
    • The Department of Finance said that it will determine the types of consumer protection measures needed in relation to digital currencies by examining the products and services provided by federally regulated financial institutions.



    • In the Committee’s view, it is the case that legislators, governments, central banks, private-sector entities in a range of sectors, customers, merchants, investors, and others are considering the opportunities and challenges that digital currencies present.
    • The Committee has concluded that digital currencies and their technologies present a variety of opportunities. In the Committee’s view, it is likely that the innovation underlying these currencies and technologies has applications that have not yet been imagined. There is evidence that they reduce transaction costs, increase the choices available to customers and merchants, protect users’ identities and record all transactions. A key focus, then, is the actions that the federal government and other entities could take to maximize those opportunities.
    • The Committee acknowledges that digital currencies and their technologies present a range of challenges. Money laundering, terrorist financing, losses due to cyber-theft, the bankruptcy of digital currency exchanges, price volatility, and a range of taxation issues are serious obstacles for a government whose primary duty is to protect its citizens.
    • Therefore, the Committee strongly believes that a balanced regulatory approach is needed in the digital currency sector.
    • The Committee is confident that the implementation of our recommendations will have positive outcomes for consumers, merchants, digital currency-related businesses, Canada’s financial services sector, and others.

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