Confused old people are discussing these. Photo via.
The past few weeks have not been so rosy for Bitcoin. The virtual currency’s oldest exchange, MtGox—originally a platform for trading Magic the Gathering Cards (MtGox = Magic the Gathering Online Exchange)—froze all withdrawals of Bitcoin or US dollars leaving their site, blaming an ancient bug in the Bitcoin code, that has caused rampant speculation in the community over whether they’re insolvent, resulting in a massive dip in Bitcoin’s value. This bad news landed right around the same time that Apple barred the Blockchain.info online Bitcoin wallet from iOS, in a move pre-empting the rumoured creation of their own electronic currency. Most recently however, news broke that the Canadian government’s latest federal budget includes oblique plans to crackdown on the online currency.
Citing its supposed usage in the nefarious world of terrorist financing and money laundering for organized crime, the government pronounced its suspicious position on cryptocurrency with increasing skepticism. 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, that threaten Canada’s international leadership in the fight against money laundering and terrorist financing.” The government came to these new measures on digital currency after a Senate Committee on Banking, Trade and Commerce undertook a five-year review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. That is to say some very old people somehow discussed internet money, confusedly.
If you look at the existing regulations that the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) uses to ensure that financial institutions aren’t helping the bad guys launder their filthy, filthy money, you’ll see that the main recommendation is to always ID the customer. FINTRAC wants to know who is using financial institutions and for what purposes. It’s possible that the language to regulate Bitcoin in this new federal budget is simply stating that Bitcoin exchanges—that allow people to transfer Canadian or US dollars into Bitcoin and other cryptocurrencies—need to maintain strong records of their customers.
In reality, the two major Bitcoin exchanges that already operate in Canada—Virtex and Vault of Satoshi—already require users to go through strict identity verification processes wherein proof of address and government photo ID must be submitted before Bitcoin can be bought, sold, or traded. Given the relative newness of Bitcoin, this may just be the federal government catching up to an already burgeoning financial market.
Even more interesting than FINTRAC’s sudden awareness of BItcoin is the federal government’s plan to give the money-tracking organization a boatload of cash to improve their analytics system, which ostensibly tracks the money connected national security threats, and will cost $10.5 million over five years. This lump sum opens up some new questions, like: What sorts of tracking are these systems capable of? And are they monitoring ledgers for patterns that will identify Bitcoin users against their will? It’s unclear if this money will go specifically towards tracking Canada’s Bitcoin market; but one could hazard a guess that it’s certainly part of the plan.
In the context of law enforcement, this is the opening salvo and the first real policy statement on the federal government’s apparent mistrust of Bitcoin and other digital currencies. FINTRAC tracks transactions around the world and reports security threats to the Finance Minister and Canada Revenue Agency (CRA). Increasing their electronic tracking abilities is a curious development, and it will be interesting to see if the country’s major Bitcoin exchanges adopt stricter policies as a result of any forthcoming government crackdown, or if the government will just beef up its money surveillance systems in private.
It’s a bit troubling that the government has invoked the “terrorist” boogeyman by placing their Bitcoin announcement under the section of the budget meant to “strengthen” Canada’s “Anti-Terrorist Financing Regime,” given how the T-word has been a government favourite to justify things like CSEC spying, or law enforcement spending. Flaherty and the Ministry of Finance may be undertaking the first stage of a challenge on Bitcoin in what could become a more government wide policy—paired with a general wariness towards the growing cryptocurrency phenomenon. The CRA already said Bitcoins will be taxed, while Canadian banks have inferred their fear, likely borne out of a threat to their controls and lucrative banking fees on transactions, which Bitcoin eliminates. At the moment no real strategies exist to track pseudonymous Bitcoin users. The old fashioned way of waiting for a regular Joe tax evader to buy a Lamborghini is likely the only real way CRA can catch tax evasion via Bitcoin. Unless that is, the RCMP, CSEC, or FINTRAC, are given sharper cyber-policing teeth to watch the cryptocurrency market.
While we wait and see what the government is planning to do about the quickly growing Bitcoin market, some journalists are calling Canada the possible Silicon Valley of Bitcoin for its rapid development of tech-entrepreneurs who are creating new products around the innovative cryptocurrency market. That’s why we reached out to Rodolfo Novak, the founder of Coinkite, an online cryptocurrency wallet service (they call it a cryptobank) that also is selling specialized debit machines that take Coinkite debit cards—charged with Bitcoin or Litecoin—to merchants across the country. He pointed out the very real danger of over-regulating a market that is providing an enormous growth opportunity for Canadian entrepreneurs: “Legislation can be good, but it's hard to imagine the Federal Government getting this right without very good research and involvement of Canadian Bitcoin related business in the process. it would be a shame if Canada's early lead in Bitcoin was hobbled by a lobbying effort disguised as "'the terrorists are coming.'”
There’s no denying Bitcoin has some seedy applications: In December an assassination market for political figures emerged online with Bitcoin the preferred method of payment for would-be assassins (along with another darker Hitman Network), not to mention Silk Road. Everything from drug and gun running to prostitution has taken advantage of the online currency, yet before its emergence regular ol’ Canadian government-issued funny-money was the preferred method of payment in the underworld. The reality is Bitcoin is being used for everything fiat currencies were used for good or bad, it’s the loss of control that scares governments and banks. @patrickmcguire & @bmakuch