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The Canadian Government Doesn't Trust—or Understand—Bitcoin

In a new Bank of Canada report, the leading cryptocurrency is described as a potential threat to global financial stability.
Image: Antana

Two weeks ago in Parliamentary committee, Stephen Poloz, the governor of the Bank of Canada, downplayed the importance of Bitcoin in the marketplace.  “These are early days… and so far digital currencies have not made it to what we call money,” said Poloz. He clearly didn't hear the currency is already buying everything from pizza to cocaine, with some people even collecting their salaries in cold hard earned Bitcoins.

But the Bank of Canada’s tune is starting to change and they're worried about digital currencies. In a freshly tabled report on digital platform currencies, the Canadian national bank is raising serious concerns about the effect of Bitcoin on the world economy.

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The report says other central banks, unsurprisingly, keep close tabs on the "decentralized" digital currency. “There could be potential risks to overall financial stability if Bitcoin became a significant means of payment and the Bitcoin system remained unstable,” the report adds.

Besides the typical knocks on digital currencies bankers often throw around, like the lack of a central issuer, market volatility, and how easy it is to misplace coins or wallet numbers, the authors of the report warn about the relative ease with which the cryptocurrency can be used in tax evasion and criminal transactions.

“Governments may become concerned about legal security and law enforcement issues associated with Bitcoins” says the report. “For example, the private nature of Bitcoin transactions, Bitcoins could easily be used to facilitate criminal transactions and to evade taxes.”

This isn’t the first time the Canadian feds were publicly wary of Bitcoin or other digital currencies. The Harper Government’s 2014 Budget virtually tied Bitcoin to tax evaders, terrorists, and the mafia. Under its “Strengthening Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” section, the feds outline how it’s paramount for Canada’s financial security regime to address the “emerging risks, including virtual currencies, such as Bitcoin, threatening Canada’s international leadership in the fight against money laundering and terrorist financing.”

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Invoking the terrorist bogeyman is a classic governmental device to drum up suspicion and public concern and it doesn't hold water when it comes to Bitcoin. As Bloomberg reported back in March, the American Treasury Department saw no widespread criminal use of Bitcoin, because terrorists don’t really use digital currency to exchange goods—they use guns, drugs, and the greenback.

There are now signs the Canadian government regulators are taking their policy fears with Bitcoin into action, with crackdowns. Saskatchewan’s Financial and Consumer Affairs Authority just filed a temporary cease-trade order against Dominion Bitcoin, an emerging Bitcoin mining company based in Regina, after alleging the company solicited investors and trading securities without proper registration.

Company President Peter Voldeng says the government took exception to the wording of their website that asks for investors to “imagine purchasing shares in a gold mine.” Although Voldeng isn't certain what exactly precipitated the shutdown, the shares comparison might've made the government think of Bitcoin as tradable securities, like a stock or bond. But under current Canadian Revenue Agency guidelines, Bitcoins are only taxable as a commodity, and Dominion maintains any investment in their mining company would’ve been in Canadian tender.

“[Government officials] have absolutely no idea how Bitcoin works or how people are dealing with it,” Voldeng told me. Because the concept of Bitcoin is “so foreign,” he says government regulators in Canada are trying to find a way to efficiently tax it. Given its online anonymity “there’s no way they can control or influence it,” Voldeng says. And that makes the government nervous.

The cease-trade order of Dominion was extended three months this morning and is just one of the  latest signs that securities regulators and government agencies are taking notice of Bitcoin in Canada.

In the States, the IRS also sees Bitcoin as a taxable commodity. How government tax agencies on both sides of the border plan on keeping track of those commodities remains to be seen. According to an internal government document obtained by The Wall Street Journal through an Access to Information Request, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is scheming ways to track Bitcoin. One way was to “choke Bitcoin’s oxygen” by denying Canadians access to foreign exchange markets, or to force Canadian Bitcoin markets underground.