Following the federal government’s invocation of the Emergency Measures Act, Deputy Prime Minister Chrystia Freeland introduced the temporary financial institution regulations that would require oversight of all “forms of transactions related to the blockade, including digital assets such as cryptocurrencies”. The focus on cryptocurrencies was likely prompted by the success of the Honkhonk Hodl Bitcoin fundraising campaign for the Freedom Convoy. Whatever you think of the convoy, this development has proven that Canadians are paying attention to cryptocurrencies. And now Ottawa too.
Freedom Convoy aside, regulators can’t just see Bitcoin and other cryptocurrencies through a nefarious lens. These events prove why we need smart regulation of cryptocurrencies, so that we can keep this sector competitive, free and legitimate.
This month, Conservative MP Michelle Rempel Garner introduced a bill to open up Canadian institutions to cryptocurrencies. The bill would require the government to coordinate with industry experts to draft a framework to help the sector grow in Canada. Since the arrival of Bitcoin in 2008, digital assets have been catapulted into a very dynamic industry worth $2 trillion. Whether it is exchanges, decentralized finance or lightning payments, there is no doubt that Bitcoin and other cryptocurrencies represent a new paradigm and a new opportunity.
Legislation like Rempel Garner’s could ensure that the industry’s ecosystem is protected from overzealous regulation, but only if we pass smart, focused, targeted regulations that don’t completely destroy the industry.
Any institution touching digital assets should have clear safeguards that provide legal certainty. This means that there is no additional bureaucracy for crypto companies opening bank accounts and insurance policies. We also need assurances that federal agencies will not penalize actors or subject them to costly and burdensome enforcement actions simply because cryptocurrencies are involved.
Failure to take these steps risks pushing crypto activity into the black market or seedy jurisdictions, where no rules or regulations will be followed. The history of prohibition or the world war on drugs, which inflated criminal activity and the black market, provides us with an example of this.
Technological neutrality should be a fundamental principle of all legislation, which means that governments should not declare winners or losers. Just as the vinyl record was replaced by the CD-ROM and then the MP3, governments should not pick a preferred cryptographic technology and instead let innovation, competition, and consumer choice make that decision.
Whether it’s algorithmic mining (proof of work), paid accounts, or easy payments, users and entrepreneurs are testing and adopting best practices for the future of crypto. If the government approves one method or prohibits another, for environmental, financial or legal reasons, it risks misfiring and stifling innovation.
Moderate taxation is another important aspect of future regulation. In Estonia, for example, cryptocurrencies are considered real estate assets but are not subject to value added tax (VAT). Capital gains are taxed accordingly but kept low to ensure investment and innovation while ensuring fairness.
Overall, regulators should not categorize cryptocurrencies solely as tax-worthy investments. They are technological tools that empower consumers and foster innovation. A single crypto asset class, separate from traditional securities, could also help users benefit from the decentralization and encryption these projects offer while ensuring wider financial adoption.
Rempel Garner’s bill is a step in the right direction, but it is important that what results from it focuses on these essential aspects. Failure to do so will leave Canada, Canadian consumers and national entrepreneurs in the cold.
David Clement and Yaël Ossowski are the Director of North American Affairs and Deputy Director of the Consumer Choice Center.