Tuesday, June 24, 2014

The Effect of Canada’s New Anti-Bitcoin Law

While traveling in Canada, I came across an article about bitcoins. It turns out while the U.S. has held hearings about bitcoins and other virtual currencies, Canada has recently (June 19, 2014) actually signed legislation. To be fair, the law affects all virtual currencies without mentioning bitcoins by name, but be sure they are the main reason the bill was passed.

Prior bitcoin posts

For those not familiar with bitcoins, I have two previous blogs. This one dealt with my skeptical view of bitcoins as a possible investment. The second one followed up with breaking news about a bitcoin depository going bankrupt, costing its customers a bundle.

Regulation as a bitcoin risk

I had not specifically mentioned it earlier, but regulation by various countries may be a significant risk to whether bitcoins or any other virtual currency becomes generally accepted as a payment mechanism.
The price of bitcoins over the long term will be negatively impacted to the extent they are not readily available in minimum-friction transactions and positively affected if they are usable with minimal transaction costs.

One purported advantage of bitcoins is that their value is determined by supply and demand, so they do not rely on any government to determine their value. That is not the same as saying governments are not able to affect its value, as I discuss below.

Canadian Law

In Canada, the main legislation dealing with money laundering is the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTF). The newly passed legislation brings bitcoin use under the jurisdiction of that Act. This means (and remember my usual caveats, I am not a lawyer and in no way should anything herein be considered legal advice):
1. Businesses utilizing bitcoins in Canada must now register under PCMLTF.
2. Businesses registered under PCMLTF must maintain extensive transaction records to prevent money laundering.
3. Canadian financial institutions are prohibited from establishing and maintaining bank accounts for customers involved with bitcoin businesses that are not registered under FINTRAC.
4. Foreign businesses that operate in Canada (including online) must comply with the Act.

Impact on Bitcoin Use

Although not sufficiently knowledgeable to perform a detailed analysis of the Canadian Act, I can foresee two major impacts on bitcoin use in Canada.

1. Once the Act is implemented, the costs of doing business using bitcoins in Canada will increase significantly. A business will need to register under PCMLTF and that will probably require consultating with expensive experts. Unless someone develops a boilerplate solution this will significantly increase transaction costs.

2. The Act eliminates one of bitcoins purported advantages: the ability to hide from the government transactions affecting Canadian entities (and to a lesser extent individuals).

Risk of More Countries Adding Similar Regulation

Because of the money laundering possibilities of bitcoin, I doubt Canada will be the last country to regulate their use by introducing expensive registration and reporting requirements. If (and when) more countries follow course, bitcoins will either (a) disappear, (b) become used primarily within countries with loose banking regulations (where gray money already collects), or (c) be driven underground and become controlled by criminal elements for whom the downside of breaking laws is less than the upside of hiding transactions.

One mitigating possibility is for countries to adopt uniform regulation, thereby diminishing the costs of worldwide compliance. Not likely in the near term.

Recent bitcoin prices

Since the Canadian bill’s signing, the price of bitcoins has dropped from $599 the day before passage to $585 on June 23. This follows soon after a nearly 11% drop earlier in the month after the U.S. announced it would sell 30,000 bitcoins seized from Silk Road.

Of course, if you had bought your bitcoins in January 2013 at $13.36, you would still have a tidy profit. If you had bought at the all-time high of $1,124.76 on November 29th of that year, you would have lost almost half your investment.

I’ve done neither and will continue to watch bitcoins from the sidelines, although there is a part of me that really would like to sell them short.

~ Jim

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