Despite recent fluctuations in value, the Bitcoin phenomenon shows no sign of slowing. The meteoric rise of the cryptocurrency presents a range of issues that law enforcement agencies, legal regulators and tax authorities must consider in determining how it fits within their existing regulatory frameworks.
Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
It is difficult to speculate why there is interest in virtual currencies in Canada. Of course, the novelty aspect may be attractive to some – particularly those who tend to be early adopters of technology and technological advances. However, apart from this emotional attachment to things that are new, two other factors may be driving interest.
Canada has a fairly concentrated banking system, with six large banks dominating the market. The level of concentration in the banking sector also has an impact on the payment clearing and settlements systems that are available in Canada. At present, there are two national payment clearing and settlement systems that process the vast majority of payments: the Large Value Transfer System (LVTS) and the Automated Clearing and Settlement System. Both systems are operated by the Canadian Payments Association (CPA). The CPA was created by statute in 1980. Every bank in Canada is required to be a member and certain non-banks that offer deposit-like products are entitled to apply for membership. However, only members whose clearing volumes meet prescribed minimums may be direct clearers. All other members must clear through one of the direct clearers. Given the degree of concentration in the banking market, only the six largest banks are direct clearers. In addition, provincially regulated credit unions clear through a small number of group clearers.
Some observers have suggested that this degree of concentration is inhibiting innovation in payment processing. However, as finality of payments is in the interest of the banks, the CPA and its members have taken steps to ensure that payments – particularly high-value payments – clear and settle quickly and efficiently. Therefore, for payments within Canada, the speed of processing of payments appears to be quite good. Of course, the steps that have been taken in Canada to address the efficiency of the payment systems have a more limited impact on the efficiency of payments coming into and out of Canada. Therefore, with respect to those payments, the potential speed and efficiency of using a virtual currency could be driving some of the growing interest in those currencies.
The government has also taken steps to address the perception that concentration in the banking market may be inhibiting innovation with respect to payment systems. A new requirement will be implemented shortly, requiring that the board of directors of the CPA be comprised of a majority of independent members.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
Recently, two measures have been introduced to regulate some aspects of virtual currencies. First, an amendment was made to Canada's anti-money laundering and terrorist financing legislation, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The amendment will require that dealers in virtual currencies register under the act. The amendment has not yet been brought into force, as further regulations are being developed to detail the regulation that will apply to these entities. It is expected that virtual currency dealers will be regulated in a manner similar to money services businesses.
Quebec recently clarified its position with respect to the application of its Money Services Businesses Act to virtual currencies. The guidance issued under the act now specifically provides that operators of the automated teller machines that dispense virtual currencies must register under the act. For the moment, registration does not subject to the operator to significant regulation. The government has also stated that the act may apply to platforms for trading virtual currencies. However, the guidance has not been updated to reflect this position, leaving some uncertainty about how the existing requirements apply.
Sine April 2014 the Senate Standing Committee on Banking, Trade and Commerce has been conducting a study of the use of digital currencies. The committee has focused much of its attention on the regulation of these currencies and whether further regulation is required at this time. The committee is expected to issue a report in June 2015.
If virtual currencies were to become a mainstream payment system, how might this affect the ability to control inflation in your jurisdiction?
The principal vehicle for controlling inflation in Canada is through the setting of a target overnight interest rate by the Bank of Canada and a framework that is designed to hold the rate within a band based on the target rate. The target rate has a bearing on both the rate that the Bank of Canada charges commercial banks for overdrafts in the settlement accounts that they maintain at the bank and the interest that the Bank of Canada will pay on any surplus balances in these accounts. The target for the overnight rate is also the rate at which the bank wants major financial institutions participating in the LVTS to borrow and to lend one-day funds among themselves to settle their transactions at the end of each day. The rate has a broader impact on inflation based on an assumption that the banks will use the target rate as the basis for determining the rate that they will charge their customers for consumer loans, mortgages and other loans.
To understand how this would be affected if virtual currencies became a mainstream payments system, it must be understood how payments would be made at that time. For example, if individuals and businesses no longer required banks to facilitate their payments, banks may not need to maintain settlement accounts at the Bank of Canada. The Bank of Canada would then have to assess whether the existing framework for influencing the rate of interest that banks charge to their customers would be effective.
What are the potential risks of virtual currencies in terms of fraud? How would these be addressed in your jurisdiction? Have any specific instances emerged in which virtual currencies have been used for money laundering or other fraudulent purposes?
There has been limited experience in Canada with respect to fraud or money laundering involving virtual currencies. The offence of 'fraud' is defined as defrauding the public or any person of any property, money or valuable security or any service. While 'money' for this purpose is defined as the Canadian dollar, 'property' is defined broadly to include any real or personal property. Therefore, it appears that the offence could apply to a fraud that involved the loss of virtual currency.
John Jason
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