While traveling in Canada, I came
across an article about bitcoins. It turns out while the U.S. has held hearings
about bitcoins and other virtual currencies, Canada has recently (June 19,
2014) actually signed legislation. To be fair, the law affects all virtual
currencies without mentioning bitcoins by name, but be sure they are the main
reason the bill was passed.
Prior
bitcoin posts
For those not familiar with
bitcoins, I have two previous blogs. This
one dealt with my skeptical view of bitcoins as a possible investment. The second
one followed up with breaking news about a bitcoin depository going
bankrupt, costing its customers a bundle.
Regulation
as a bitcoin risk
I had not specifically mentioned it
earlier, but regulation by various countries may be a significant risk to whether
bitcoins or any other virtual currency becomes generally accepted as a payment
mechanism.
The price of bitcoins over the long
term will be negatively impacted to the extent they are not readily available in
minimum-friction transactions and positively affected if they are usable with
minimal transaction costs.
One purported advantage of bitcoins
is that their value is determined by supply and demand, so they do not rely on
any government to determine their value. That is not the same as saying governments
are not able to affect its value, as I discuss below.
Canadian
Law
In Canada, the main legislation
dealing with money laundering is the Proceeds of Crime Money Laundering and
Terrorist Financing Act (PCMLTF). The newly
passed legislation brings bitcoin use under the jurisdiction of that Act. This
means (and remember my usual caveats, I am not a lawyer and in no way should anything
herein be considered legal advice):
1. Businesses utilizing bitcoins in
Canada must now register under PCMLTF.
2. Businesses registered under
PCMLTF must maintain extensive transaction records to prevent money laundering.
3. Canadian financial institutions are
prohibited from establishing and maintaining bank accounts for customers
involved with bitcoin businesses that are not registered under FINTRAC.
4. Foreign businesses that operate
in Canada (including online) must comply with the Act.
Impact
on Bitcoin Use
Although not sufficiently
knowledgeable to perform a detailed analysis of the Canadian Act, I can foresee
two major impacts on bitcoin use in Canada.
1. Once the Act is implemented, the
costs of doing business using bitcoins in Canada will increase significantly. A
business will need to register under PCMLTF and that will probably require
consultating with expensive experts. Unless someone develops a boilerplate
solution this will significantly increase transaction costs.
2. The Act eliminates one of
bitcoins purported advantages: the ability to hide from the government
transactions affecting Canadian entities (and to a lesser extent individuals).
Risk
of More Countries Adding Similar Regulation
Because of the money laundering
possibilities of bitcoin, I doubt Canada will be the last country to regulate
their use by introducing expensive registration and reporting requirements. If
(and when) more countries follow course, bitcoins will either (a) disappear,
(b) become used primarily within countries with loose banking regulations
(where gray money already collects), or (c) be driven underground and become
controlled by criminal elements for whom the downside of breaking laws is less
than the upside of hiding transactions.
One mitigating possibility is for
countries to adopt uniform regulation, thereby diminishing the costs of
worldwide compliance. Not likely in the near term.
Recent
bitcoin prices
Since the Canadian bill’s signing,
the price of bitcoins has dropped from $599 the day before passage to $585 on
June 23. This follows soon after a nearly 11% drop earlier in the month after
the U.S.
announced it would sell 30,000 bitcoins seized from Silk Road.
Of course, if you had bought your
bitcoins in January 2013 at $13.36, you would still have a tidy profit. If you
had bought at the all-time high of $1,124.76 on November 29th of
that year, you would have lost almost half your investment.
I’ve done neither and will continue
to watch bitcoins from the sidelines, although there is a part of me that
really would like to sell them short.
~ Jim
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