Downes.ca ~ Stephen's Web ~ The Canadian Government and Cryptocurrency

The Canadian Government and Cryptocurrency

Half an Hour, Sept 12, 2019
By Stephen Downes

This is the result of a quick survey I did today on the Canadian governments' stance on cryptocurrency, responding to an internal request. This is a policy-neutal document; that is, I don't advocate one way or another for any of the items described below.

Overall, over the last few years, Canada's stance could be described as cautious engagement. There are two major thrusts. First, various branches of government - including the Bank of Canada, National Research Council, and Treasury Board - are conducting reserach, holding workshops, and initiating pilot projects to seehow blockchain can be employed to support governance. Second, the government has passed and begin to enforce regulations to address the problems of fraud and digital currency crime.

Below you can find an outline of this work and links to primary and secondary references. For those wanting more on blockchain in general, I've been compiling a detailed resource base on associated technologies.

Canada Revenue Agency Policy

Their information page is here: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency.html

In a nutshell: cryptocurrency is not legal tender in Canada, which means you are not required to accept it. However, you may accept it in exchange for goods and services if you wish.

If you do accept cryptocurrency, even if from international sources, you must treat it as income, and assess its value according to fair market value at the time of the transaction. Personal transactions are taxable as income tax, while commercial transactions are subject to Goods and Services Tax (GST).

Treasury Board

Alex Benay (CIO of canada): on a Digital Public Service. October, 2018. https://www.canada.ca/en/treasury-board-secretariat/corporate/news/alex-benay-digital-public-service.html "The country that changes their laws the fastest, that changes their regulations the fastest, that helps, for example, accommodate block chain and cryptocurrency technologies the fastest, will have major socio economic benefits" (That's basically all he says about crypto in this short talk).

Bank of Canada

The Bank of Canada is not a banking regulator and does not have regulatory authority over fintech startups. Still, it has taken part in a pilot project, called Project Jasper (see below) and authored a number of reports examining the impact of digital currency. It has also contributed to Canada's regulatory agenda, as noted here: https://www.bankofcanada.ca/research/digital-currencies-and-fintech/collaboration-on-the-regulatory-agenda/

Report: Central Bank Digital Currency and Banking. 2019. https://www.bankofcanada.ca/wp-content/uploads/2019/05/swp2019-20.pdf Jonathan Chiu, Mohammad Davoodalhosseini, Janet Jiang and Yu Zhu. This paper builds a model to assess the effects of introducing a central bank digital currency (CBDC). "We then calibrate the model to the US economy and find that with a proper interest rate, CBDC can raise bank lending by around 7% and increase output by around 1%."

Report: Crypto "Money": Perspective of a Couple of Canadian Central Bankers. 2019. http://publications.gc.ca/collections/collection_2019/banque-bank-canada/FB3-6-2019-1-eng.pdf James Chapman1 and Carolyn A. Wilkins. Discusses three policy questions:

what is fundamentally new about the technology that underpins cryptocurrencies and other cryptoassets?
how do cryptocurrencies affect a central bank's role in the economy?
given the two challenges of a rise of cryptoassets and a decline in the use of cash, should digital payments be left entirely to the private sector or should central banks issue their own digital currencies?

Reports: Bitcoin Awareness and Usage in Canada. http://publications.gc.ca/collections/collection_2017/banque-bank-canada/FB3-5-2017-56-eng.pdf and Bitcoin Awareness and Usage in Canada: An Update. Christopher S. Henry, Kim P. Huynh and Gradon Nicholls. 2018. https://www.bankofcanada.ca/wp-content/uploads/2018/07/san2018-23.pdf "Update of the results of the 2017 Bitcoin Omnibus Survey (BTCOS) conducted by the Bank of Canada from December 12 to 15, 2017."

Warnings from Stephen Poloz

According to reports, "Bank of Canada governor Stephen Poloz is sounding the alarm on Bitcoin, calling the purchase of the cryptocurrency 'closer to gambling than investing.' In a speech at the Canadian Club Toronto on Thursday, the governor said Bitcoin is not a reliable store of value and does not constitute 'money.' He added that buying the cryptocurrency 'means buying risk' and urged those flocking to it to 'read the fine print.'" From December, 2017. https://www.canadianunderwriter.ca/legislation-regulation/buying-bitcoin-means-buying-risk-says-bank-canada-governor-1004125212/

See Stephen Poloz (2017), "Three Things Keeping Me Awake at Night," December; Karen Tso and Arjun Kharpal (2018), "Bitcoin is 'gambling' and regulations are needed, Canada central bank head says," CNBC, 25 January.

Project Jasper

"Project Jasper was launched in March 2016 with the aim of understanding how distributed ledger technology (DLT) could transform the future of payments in Canada. The project represents a collaborative effort between Payments Canada, its member financial institutions, the Bank of Canada and other market participants."

October, 2018: "Payments Canada, the Bank of Canada, TMX Group, Accenture (NYSE: ACN) and R3 have published a report demonstrating the feasibility of clearing and settlement of securities using distributed ledger technology (DLT)."
- Report: https://www.payments.ca/sites/default/files/jasper_phase_iii_whitepaper_final_0.pdf
- Payments Canada page - https://www.payments.ca/industry-info/our-research/project-jasper
- Bank of Canada page - https://www.bankofcanada.ca/research/digital-currencies-and-fintech/fintech-experiments-and-projects/
- Accenture: press release
- Coverage:
- Bank of Canada Proves Blockchain Can Settle Equities in Project Jasper Phase III.Coinsquare
- Project Jasper: Lessons From Bank of Canada's First Blockchain Project. Coindesk
- Bank of Canada, Accenture publish blockchain report re Project Jasper. Ledger Insights

Other Pilot Projects

NRC Blockchain prototype: https://nrc-cnrc.explorecatena.com/en "used the Ethereum blockchain to proactively publish grants and contribution data in real time, a measure that complemented ongoing quarterly proactive disclosures available through the Open Government website."

Various jurisdictions in Canada have undertaken pilot projects in the use of cryptocurrency. Some examples: "The Ontario town of Innisfil will soon begin accepting digital currencies as payment for its property taxes, starting with Bitcoin," according to CBC News.

IBM, British Columbia, and the Digital ID & Authentication Council of Canada (DIACC) developed a proof of concept to explore the viability of blockchain for corporate registries, 2017. https://diacc.ca/2017/06/06/is-blockchain-the-answer-to-corporate-registries-in-canada/

Summary report from the 'Blockchain in Government' workshop, including summeries of talks by "Public Sector Blockchain Pioneers" Glenn O'Farrell: CEO, Groupe Média TFO; John Shannon: Acting Director General, Digital Technologies Research Centre, National Research Council Canada; Troy MacFarlane: Acting Director Digital Target State Architecture, Treasury Board of Canada Secretariat. https://iog.ca/docs/Blockchain-in-Government-Workshop-Summary-Report.pdf

Response to the QuadrigaCX Case

Investigators have yet to determine what happened to about $190 million worth of cryptocurrency that has been missing or inaccessible since December, when a co-founder of QuadrigaCX trading platform died without revealing his password. (CBC - https://www.cbc.ca/news/canada/toronto/innisfil-property-tax-uber-ontario-bitcoin-crypto-1.5075961 )

More:

How not to manage risk at a cryptocurrency provider. Canadian Underwriter

Crackdown on Fraudulent Cryptocurrency Platforms

In 2018 the government passed a nukmber of amendments to legislation to crack down on digital currency crime. The amendments are described in the Canada Gazette: http://www.gazette.gc.ca/rp-pr/p1/2018/2018-06-09/html/reg1-eng.html

In 2018 Canada participated in an international 'Operation Cryptosweep' to crack down on fraudulent cryptocurrency operators. A list of actions can be found at the North American Securities Administrators Association (NASAA): https://www.nasaa.org/policy/enforcement/operation-cryptosweep/ The following actions were taken by Canadian regulators:

RESPONDENT	AGENCY	ACTION	NOTES
Antivolatility Coin, ZZZ Coin, Power Invest Group, Frank Bernier, William Bolduc	Autorité des marchés financiers (AMF) – QUEBEC (CANADA)	Cease & Desist Order	Offer and sale of unregistered securities; registration violations; offer and sale of derivatives; misleading and deceptive statements; offer of investments in the cryptocurrency mining pools; offer and sale of investment tied to the cryptocurrency ecosystem through multi-level marketing schemes.
Cryptocashback c/o Kapsus Technologies Ltd.	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration
DasCoin	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration
Digitalticks	British Columbia Securities Commission	Cease &Desist Letter	Potentially offering or promoting securities without registration
Disciplina*	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration *(RESOLVED per regulator)
Doctailor	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration
Krios	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration
Plexcoin	Autorité des marchés financiers (AMF) – QUEBEC (CANADA)	Cease & Desist Order
Sigil Platform*	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration *(RESOLVED per regulator)
Taklimakan Network	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration
ThinkCoin*	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration *(RESOLVED per regulator)
Tripbit*	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration *(RESOLVED per regulator)
Ubcoin*	British Columbia Securities Commission	Cease & Desist Letter	Potentially offering or promoting securities without registration *(RESOLVED per regulator)

More coverage of Operation Cryptosweep:

Operation Cryptosweep: 200+ Crypto Cases in North America, 46 Enforcement Actions . Bitcoin.com
Investors warned about five Ontario firms in global investigation 'Operation Cryptosweep'. Financial Post
Canada: NASAA Announces Initial Results Of Operation Cryptosweep. Cassels Brock
US and Canadian Securities Regulators Unite for 'Operation Cryptosweep'. News BTC

Budgetary Allocation

From Budget 2019 https://www.budget.gc.ca/2019/docs/plan/chap-04-en.html
"To further combat tax evasion and aggressive tax avoidance, Budget 2019 proposes to invest an additional $150.8 million over five years, starting in 2019–20. This investment will allow the CRA to fund new initiatives and extend existing programs, including:

Hiring additional auditors, conducting outreach and building technical expertise to target non-compliance associated with cryptocurrency transactions and the digital economy.
Creating a new data quality examination team to ensure proper withholding, remitting and reporting of income earned by non-residents.
Extending programs aimed at combatting offshore non-compliance."

Ongoing Issues

The government of Nova Scotia issued a 'Investor Alert for aGifttoken', which claims to have an office in Romania. The alert noted, "It is illegal to solicit investments in Nova Scotia without registering with the commission and complying with Nova Scotia securities laws." https://novascotia.ca/news/release/?id=20190807003

International

The Financial Stability Board (FSB) published Crypto-asset markets: Potential channels for future financial stability implications in October, 2018

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