Canadian Crypto Expansion
Scenario:
Timeline
2009: Satoshi Nakamoto publishes the first Bitcoin whitepaper, outlining the design and concept of the world’s biggest cryptocurrency
2011: Bitcoin exchange Mt. Gox has millions in Bitcoin stolen after a hack of its site
2015: The second largest cryptocurrency system, Ethereum, is released
Jan 2018: Bitcoin prices plummet from a high of over $22 000 CAD per coin to around $8500
Jan 2018: An alpha of the “Lightning Network” goes online, hoping to increase Bitcoin transaction speeds.
March 2018: The G20 releases a joint statement calling on international financial bodies to investigate and create potential global regulation for cryptocurrency
Major businesses in Canada begin to accept cryptocurrencies as a form of payment
The truth is that the nature of work has changed because of profound, and generally benign, global economic innovation. This transformation, driven primarily by automation and the digital revolution, is broadly positive.
- Chrystia Freeland
What Is
"Cryptocurrency"
Current Trends
Since the creation of Bitcoin, cryptocurrency has seen a mass surge in exposure and popularity. While the original intention of Bitcoin was to provide users with a decentralized and anonymous currency, a number of other coins have been created with additional purposes as well. Ethereum, for example, was created to execute “smart contracts”, which are contracts that are programmed to be executed once certain conditions have been met.
Bitcoin and other cryptocurrencies have also become popular for investors and speculators.[8] One Bitcoin could be sold for over $19 000 USD dollars late last year, and the explosion in price and excitement led to a mass of news stories, memes, and new coins to take advantage of the buzz. However, a deflationary bubble and fear of future regulations saw the currency plummet to around $6000 USD only a few weeks later.[9] While the cryptocurrency market has rebounded slightly, prices remain highly volatile.[10]
Current Policy
Under Canadian law, cryptocurrencies are considered assets. They are not considered an actual currency, despite the popular nomenclature. Therefore, purchases made with cryptocurrencies are subject to the barter provisions under the Income Tax Act.[11] Any purchase with an asset under the barter provision means that capital gains tax may be applied to the transaction. Therefore, a consumer who pays with Bitcoin will have to pay the ticket price, HST, and potentially capital gains on their income tax statement if the cryptocurrency gained in value between the time that they purchased it and the time that they spent it.[12]
Any purchases made with Bitcoin or another cryptocurrency have to be reported on your income statement.It is also important to note that Bill C-31 established that companies “dealing in virtual currencies” were bound to the “Proceeds of Crime (Money Laundering) and Terrorist Financing Act.”[13] As such, companies dealing in virtual currencies are subject to “record keeping, verification procedures, suspicious transaction reporting and registration requirements.”[14] While the government stated that this would only apply to cryptocurrency exchanges, it does not say this in the law itself.[15]
Cryptocurrency and International Relations
Cryptocurrency offers Canadians a new, transnational form for conducting business. Rather than purchasing goods and services with Canadian dollars and dealing with international exchange rates, cryptocurrencies could theoretically allow for quicker, cheaper and easier international transactions than with traditional forms of cash.[16] This can have the net effect of making international business easier for a whole segment of people who do not traditionally have access to transit currencies like USD, EUR, or GBP.[17]
Furthermore, a decentralized and peer to peer network currency allows individuals to use a method of exchange that exists outside of the realm of the Bank of Canada.[18] While this would have been possible in the past with other government backed currencies, cryptocurrencies would allow individuals to hold, spend and invest using a method of exchange not backed by any singular government. Since Bitcoin and many other currencies have finite numbers of coins, no single authority would be able to manipulate the amount of currency within the economy; however, unlike normal currencies, Bitcoin can be fractioned down to 0.00000001 units (called a Satoshi).[19]
Current Resources and Inputs
So, what would happen if a major company in Canada started to accept Bitcoin? Would cryptocurrencies be able to be used for their intended purpose on a large scale?
Experience of Consumers
Currently, the tax burden on users of cryptocurrency is exceptionally high. Apart from paying HST and the ticket price, a shopper purchasing with cryptocurrencies would need to list their purchase on their yearly tax return.[20] This makes purchases with cryptocurrency cumbersome and expensive under the current tax regime. Additionally, while the Bitcoin “Lightning Network” is still being tested, cryptocurrency transaction speeds remain considerably slower than credit card transactions.[21] VISA is able to process thousands of times the amount of transactions as the Bitcoin blockchain during the same time period, and the energy that it takes to do this is considerably less.[22]
Price volatility is also another major concern for consumers. Over the past thirty days, the price of Bitcoin has gone from around $12 000, up to $15 000, and then all the way down to $10 000 CAD per coin.[23] This level of price fluctuation would make holding onto cryptocurrencies such as Bitcoin a significant challenge for consumers. The risk of buying into the currency, only to have it bottom out as a result of a market selloff, makes its practicality as a day to day store of value suspect.[24]
Experience of Businesses
Businesses accepting cryptocurrencies also face a number of formidable questions. First, companies accepting crypto would have two choices in this scenario:
1
Hold on to that crypto
1
2
Convert it to cash
Cryptocurrencies are not considered legal tender in Canada, and so there would likely be an incentive for businesses to sell some of the crypto they receive to pay their operation costs and debts.[25]
It is also important to ask if a corporate wallet would be vulnerable. Bitcoin and several other cryptocurrencies are only pseudonymous, meaning that if you know who you are trading with you know what their account number is via their public key.[26] To access someone’s wallet, you need their private key as well.[27] Unfortunately, due to the single factor authentication on many of Bitcoin wallets, this is all one would need in order to access the company’s wallet and empty its contents.[28] This is also a likely factor that would push the company to be consistently dumping its coins for CAD on the market.
Businesses would also face risks in regards to price volatility. If the price of an accepted cryptocurrency were to plummet, then the business accepting coins would have lost money on that transaction. This, combined with high fees to process cryptocurrency transactions, has led some businesses, such as Valve, to stop accepting cryptocurrency as a form of payment.[29]
Impact on the Canadian Economy
If Bitcoin became a popular method of exchange within the Canadian economy, then CAD could be flowing out of the economy to international sellers of Bitcoin. This would create a situation whereby the nation’s monetary policy would be inaccurate.[30] The Canadian government may not know the real velocity of money in the country, which would make monetary policy through a change in the interest rate potentially wrong.[31]
Cryptocurrency is an international tool that one can use to sidestep the necessity of a government currency. The ability to manipulate the economy with money will be diminished the more that people switch over to cryptocurrencies, giving governments less control over the flow of money within their own borders.[32]
Sufficiency and Outcome
Reflecting on the lack of practical uses in normal retail, should the Canadian government change its policy?
When looking at practical and legal regime surrounding the use of cryptocurrencies in everyday purchases, it becomes clear that a business accepting cryptocurrencies for goods and services in Canada would likely face a number of unnecessary headaches. Transactions may be slower, the volatility makes holding on to it a challenge, and the non-legal tender status of cryptocurrencies makes their uses in other aspects of business uncertain.
The Canadian government should keep the policies surrounding cryptocurrencies fairly relaxed. This is a known as a “regulatory sandbox” approach and would be far more beneficial in the long run.[33] The Ontario Government has followed this approach, stating that it would
be flexible with regulations in order to promote innovation in the field of cryptocurrencies and finance technology.[34] Decreasing regulation would be unlikely to impact purchases at every day retailers due to price volatility and slow transaction speeds currently making it more cumbersome than cash.[35]
Some companies, such as Ethereum, have complained that the regulatory landscape in Canada is not clearly defined. FINTRAC, the Department of Finance and other financial regulatory bodies have not given clearly outlined stances on entrants to the “money services businesses” sector that cryptocurrency companies belong to as per Bill C-31.[36] Fixing these discrepancies and explicitly creating a regulatory framework for cryptocurrency and blockchain tech businesses could go a long way for in raising venture capital confidence in the Canadian market.[37]
While it may not be useful for everyday purchases, cryptocurrencies like Bitcoin and the blockchain technology that they are based on may be useful for several other purposes:
1
Bitcoin can be exceptionally useful for micropayments. A single Bitcoin can be fractioned all the way down to a “Satoshi”, or 0.0000001 units of Bitcoin.[38] This means that Bitcoin could be used to buy practically anything despite its exchange price with other currencies. One Satoshi is currently valued at one hundredth of a cent.
2
Cryptocurrency may be a useful way to attract investment to Canada for people who do not want to hold CAD. By having an internationally recognized method of exchange. international investors may be more inclined to invest in Canadian businesses if they do not have to hold CAD in order to do so. This also provides an alternative to holding American dollars as an international vehicle currency.[39] Cryptocurrencies may also allow certain groups to gain a level of autonomy and economic independence from a central governing authority; Mazacoin, a cryptocurrency developed by the Lakota Nation, serves as an interesting example.[40]
3
The cryptocurrency industry has the potential to generate jobs in fields like online exchanges.[41] Blockchain also has potential to create new and emerging uses in payment systems, information storage, accounting, and crowdfunding projects.[42] Maintaining a relaxed regulatory framework would be beneficial for attracting investment in potentially lucrative future industries.[43]