Canada Proposes Greater International Cryptocurrency Regulation
Global economic innovation … driven primarily by automation and the digital revolution, is broadly positive … Managed fairly, it has the potential to increase prosperity for all -Chrystia Freeland
History of Cryptocurrency Regulation
1985: David Chaum publishes "Security Without Identification." The paper discussed the concepts of anonymous digital cash
MAR 1993: The CypherPunk meeting in 1992 led to the creation of the CypherPunk Manifesto,
JAN 2009: Satoshi Nakamoto introduced the bitcoin whitepaper.
OCT 2009: The first transaction of Bitcoin currency, in block 170, takes place between Satoshi and Hal Finney,
FEB 2010: The value of the first bitcoin transactions were negotiated by individuals on the bitcointalk forums with one notable transaction of 10,000 BTC used to indirectly purchase two pizzas delivered by Papa John's
JUL 2011: First major theft. Bitcoin Forum member, allinvain, claims that 25,000 BTC were stolen from his wallet. At the time, the exchange rate put the amount close to US$375,000
NOV 2013: Virgin Galactic Announces they will accept Bitcoin for space travel trips.
MAY 2017: Over 1000 different cryptocurrencies are in the market, all with different purpose but exceeding the market cap and exposure of cryptocurrencies to the whole world
Scenario
In the near future United States experiences a small scale terrorist attack, immediately afterwards accusations arise from the American media that cryptocurrencies were used to finance this attack. Under pressure from American public, the U.S. government begins to seriously consider banning cryptocurrencies. In response, Canadian government crafts its own position on cryptocurrencies that promotes the physical and financial security of Canadians.
Chrystia Freeland's Speech on Canadian Foreign Policy
“In each of these evolutions in how we humans organize ourselves, Canadians played pivotal roles”
“Canada has been deeply engaged in, and greatly enjoyed the benefits of, a global order based on rules”
Global economic innovation … driven primarily by automation and the digital revolution, is broadly positive … Managed fairly, it has the potential to increase prosperity for all
If Chrystia Freeland’s 2017 address to the House of Commons was a true indication of what she wanted for Canadian foreign policy, then it is crucial the federal government begin taking more concrete steps towards a coherent cryptocurrency policy. The ongoing development of cryptocurrencies presents both opportunities and challenges for governments around the world. If Freeland wants to see Canada continue to play pivotal roles in the development of international organizations, the development of a global order based on rules and continuing the trend of global economic innovation which benefits not just the rich but also everyday Canadians, the Minister of Foreign Affairs would benefit from a thorough cryptocurrency policy
Background Resources and Current Inputs
BIS,FATF
CSE, CSIS
Although the question of how widespread the future use of cryptocurrencies will be is still up for debate, encouraging innovative financial technologies and the financial security of Canadians is a constant in Canadian policy. For this reason it is important that the Canadian government develop strategies that take into consideration the current international feeling towards cryptocurrencies, mitigate their potential financial and security threats, as well as its approach to international regulatory bodies that will dictate the future international regulations towards cryptocurrencies. The Canadian government has many resources to achieve this task with memberships to the Bank for International Settlements (BIS), Financial Action Task Force (FATF), and agencies such as the Communications Security Establishment (CSE) and Canadian Security Intelligence Service (CSIS) to only name a few.
In late 2016 the CSIS announced blockchain technologies (cryptocurrency included) were a “mega-trend” that will impact economies, society and security over the next 5-15 years.[1] Since 2009 Bitcoin and other alternative cryptocurrencies have grown in international popularity, in part due to their new and innovative features. Cryptocurrencies consist of digitally encrypted strings of numbers that are securely and directly transacted between users, with transactions verified by decentralized networks before being finally displayed on public ledgers.[2] Many users of cryptocurrencies find this relatively new technology attractive because of its higher than normal transaction speed, relative anonymity, global reach, independence from central authority, double spending protection and low transaction fees.[3] A major 2017 study conducted by Cambridge Centre for Alternative Finance found that there was between 2.9-5.8 million cryptocurrency wallet users world-wide, giving a rough idea of its user base.[4] Another finding of this study was that the largest area of the cryptocurrency sector in regards to employment and operating entities was the currency exchange sector, consisting of businesses that exchange state currencies for cryptocurrencies for their users, and are often the target of state regulation because of their public nature.[5]
"mega-trend"
Unawareness of Intricacies
An interesting aspect of cryptocurrency and blockchain technology is that despite widespread knowledge of their existence, there is a general unawareness of how the two actually function and what purpose they serve. For example, in a recent survey of it was revealed that while 79% of Americans have heard of Bitcoin, nearly 89% of Americans either believe it to be illegal or are unsure of its legality.[6] This unfamiliarity with cryptocurrency and blockchain technology poses a significant risk for emerging cryptocurrency technology because it retains a "dark-web" stigma.[7] While cryptocurrencies have entered the mainstream conversation, most people still associate it as a tool for acquiring illegal products or conducting illegal activities. These views were especially prominent in the aftermath of the Charlie Hebdo terror attack in Paris. The weapons wielded by the Paris attackers included several AK-47 rifles, an M82 grenade launcher, hand grenades, and Tokarev handguns. In trying to figure out how these weapons found their way into the streets of Paris, the secrecy and inexperience surrounding cryptocurrency lead many to believe that they had been bought over the internet using Bitcoin. This led to an outcry over the use Bitcoin, despite the fact that the weapons were not purchased using any cryptocurrency and were actually purchased in person in Belgium.[8] Nonetheless, this incident highlights how general unawareness of cryptocurrency technology may result in widespread negative perceptions of cryptocurrency in the event that a terrorist attack takes place
Current Resources and Inputs
Sufficiency and Likely Objectives
Objectives
for Canada
Short- Term
In the short term to mitigate these risks the Canadian should continue to support institutions that take an international approach to the issue of regulating crypto-currencies to prevent their use by criminals and terrorists. The Bank for International Settlements, United Nations, Asia/Pacific Group on Money Laundering, G20 and FATF are the best institutions to perform this strategy, with a particular emphasis on FATF since it is posed to be the most influential institution in this area. Moreover, in the event that the United States does ban cryptocurrency, the Canadian government should not overreact or feel pressured to do the same. The history of Canadian-American relations are littered with foreign policy differences. Canada and the United States have held divergent views as it pertains to relations with Cuba, the Vietnam and Iraq War, and trade disputes over issues such as softwood lumber. In the short term, to avoid gross miscalculations, the Canadian government should keep this in mind. While the banning of cryptocurrency and possibly its associate technologies in the world`s largest economy would certainly cause shockwaves in Canada, the Canadian government must remember that Canada has adapted to disagreements of this type before and still come out as a strong independent actor.[18] Furthermore, Canada has been most effective in taking stances different from the United States when it is able to define a transparent and concise policy.[19] Therefore, Canada should not fear taking a stance different from the U.S., though it must prepare itself to do so by eliciting a clear strategy.
Mid-Term
In the midterm the Canadian government can support the international organizations previously mentioned by presenting innovative regulatory strategies and technologies of its own, developed by the Canadian financial technology sector through encouragement by the Canadian government.[20] An ideal example of this type of activity is the 2016 partnership between Canadian based ATB Financial, Ripple Labs and Germany’s ReiseBank, that conducted the world’s first international money transfer using blockchain technology.[21]
In the long term the Canadian government should make every effort to ensure that the public and private sector becomes increasingly involved in international organizations involved in innovation and regulation for blockchain technologies such as cryptocurrency. This will help forward a policy position that enhances AML/CTF measures while at the same time encouraging technological innovation, to safeguard potential Canadian prosperity in the financial technology industry. From a regulatory standpoint, the FATF will likely become increasingly involved in cryptocurrency and financial technology regulation, becoming a principle actor in this area long-term. For this reason Canada should take the necessary measure to become as influential in this organization as possible. This can be pursued by becoming an international expert in this area by encouraging Canadian companies to maintain memberships in forums such as R3 CEV, a collection of 80 of the largest international financial institutions that are at the forefront of blockchain innovation in the financial industry.[22]