Cryptocurrency and the Issue with the Canadian Economy

Introduction

With the rising popularity of Cryptocurrencies such as Litecoin and Bitcoin, this will soon become a more involved in our ever-changing lifestyle. This is due to the increase of awareness in cryptocurrency, making it no surprise that cryptocurrency will soon be the driving force for the Canadian economy in years to come.  Since Cryptocurrency is fairly new we won’t know the risk that will happen to the economy in the long run.  This is due to the uniques properties of Cryptocurrency compare to flat currency such as the Canadian dollar ,for example there is a finite limit on the number of bitcoins that will ever exist which is 21 million (“Connecting the World to Crypto.”2017) this will have a drastic impact on the way  inflation or deflation impacts the currency These uncertainties have caused the  governments  to be afraid of the cryptocurrency due to the lack of knowledge and uncertainties  towards  the economy The main issue government are worried about is the  peer-to-peer payment network that is powered by its users with no central authority or middlemen (government).” (Why Governments Are Afraid of Bitcoin 2018”). The government has no way of controlling or tracking these currencies causing a decline within our economy, This issue is important due to the many corporations and people investing in a cryptocurrency without knowing the harm it causes towards the economy.

Background

Governments control flat currencies. This allows them to use central banks to either create/issue or destroy money depending on what better for the economy using the monetary policy. Flat currencies only have value because the central government say it does this means that Flat currencies are fully  backed by the credit of the government The government also indicates how flat currencies can be transferred from place to place allowing them to track the currency this allows them to figure out who profits from that movement, collect taxes on it, and trace criminal activity. All of this government control is gone when non-government bodies create their own currencies  (Why Governments Are Afraid of Bitcoin 2018”) such as cryptocurrency. Without these such rule and regulation within cryptocurrency, it makes it harder to track causing an increase in crime due to illegal activities such as human/drug trafficking. Cryptocurrency is supposed to be taxed like any other investment for example 50% of the gains are taxable and added to your income for that year. This will be added to your income and taxed at your provincial marginal tax rate. But since the government has no way of tracking many of these income go  

Current Status

The global crypto market is now worth 252 billion (CAD) in total, an amount which could be seen as it full strength within the economy. With this in mind, the current state of Cryptocurrency has led many to reclassify cryptos from a niche past-time to an increasingly integral part of the global financial system. However, some crypto critics, including Warren Buffet and Bill Gates Has continued to speak about uncertainty over the furthering devolvement technology due to the fear of the market crashing along with the new report of stealing and fraudulent reports. Moreover, the current state of cryptocurrencies is difficult to define and as there is a range of issues the sector is facing. As far as policy goes, to ensure the legitimacy of users is important in the use of Cryptocurrency. This is because if providers want to gain faith in their user base, they need to make sure they are investing a lot of their money into protecting against these hacks. It is also useful that correct security measures are used preventing future hacks s. With the cryptocurrency sphere continuing to develop at a fast pace, as far as who is involved in this matter goes, regulatory bodies are now increasing their involvement. For instance, within the last few months, the topic of rules and regulation bring fear among the crypto community. Many new rules may prevent innovation which has been the reason for bitcoin rapid growth so far. A situation that this matter is attempting to solve is fraudulent behaviour as in between January 2017 and May 2018, it is estimated that over 1.2 billion dollars cryptocurrency was stolen from exchanges  We are even beginning to see institutional getting involvement with cryptocurrency. The trading volume from the institutional client for the first time exceeded that of retail trade. In early 2019 the value of cryptocurrencies remains low due to the few amounts of businesses willing to accept this form of currency. In order to change this cryptocurrency must be simpler to obtain.

Policy Alternatives

 Something that should be taken into consideration when looking at policy alternatives is the fact that most digital currencies are not backed by any central government, meaning each country has different standards. At the moment there are no global regulators that exist. In addition, the International Monetary Fund has also called for more cooperation. IMF Managing Director Christine Lagarde highlighted cryptocurrencies potential as a vehicle for money laundering and the financing of terrorism. In a March, Lagarde called for policies that protect consumers in the same way as the traditional financial sector.

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Focusing in on Canada we see that cryptocurrencies are not considered legal tender. This is because  Canada’s tax laws and rules, including the Income Tax Act, will, also apply to cryptocurrency transactions. The Canada Revenue Agency has identified cryptocurrency as a commodity and stated that the use of cryptocurrency to pay for goods or services should be treated as a good transaction The current policy for Cryptocurrency as this time was amended in 2014 when the Governor General of Canada gave his royal assent to Bill C-31, this includes alteration to Canada’s Proceeds of Crime  Terrorist Financing Act.and (Money Laundering)  The new law treats cryptocurrency as “money service businesses” for purposes of anti-money laundering provisions. The law is not yet in force, pending issuance of subsidiary regulations. The law is the “world’s first national law on digital currencies, and certainly the world’s first treatment in law of digital currency financial transactions under national anti-money laundering law.” Although the law has received royal assent it is not yet in force, There have been recent news reports that might that the government may be about to issue those regulations. As far as laws around security go, on August 24, 2017, the CSA (Canadian Securities Administrators () published a  Notice which outlined how securities law requirements would apply to any initial coin offerings (ICOs), initial token offerings (ITOs), cryptocurrency investment funds as well as the cryptocurrency exchanges. Also with this said, on February 1, 2018, the Globe and Mail had stated that the Ontario Securities Commission had finally approved the country’s first blockchain fund.

Moreover, another focus area for regulators has been placed on mining operations. Mining is basically the process on blockchain of how cryptocurrency transactions are created on the blockchain. Mining involves high powered computers and large electrical supply something that has concerned governments, particularly in China due to the high population. Currently, The Bank of Canada has a Blockchain Project which is a database technology company that looks to understand how distributed ledger technology (also referred to as DLT) could possibly change the wholesale payments system entirely. With this idea in mind, in June 2017, the Bank of Canada had published a report on the preliminary findings. These findings stated that the critical financial market infrastructures, including things such as wholesale payment systems, current versions of DLT may not provide an overall net benefit.  In addition to this, on October 17, 2017, Payments Canada, the Bank of Canada, and TMX Group has revealed “a new collaboration to experiment with a new integrated security and payment system based on distributed ledger technology (DLT)  part of the  Project Jasper research initiative.

Policy Recommendations and Plan of Action

 The steps that should be taken in addressing the policy issues revolving around cryptocurrency, is first establishing trust between users of this technology. When there is a solid foundation of trust laid down this makes it much easier to trade and sell with users and ensure that this is done through a legitimate forefront. Finding users is difficult because of the issue around the legitimacy of users. With this said, cryptocurrency exchanges have often been seen as unsafe and sketchy due to the amounts of hacks and the unregulated nature of these trade. This has caused a drive to monitor financial products onto the traditional market. There have been numerous attempt to get Bitcoin trade fund available to launched but none has been successful.striking the right balance between regulating digital currencies to provide good  protection for consumers and businesses has been hard while not trying to slow down innovation               Now, for what is next to come, Around the globe, many regulators and governments are trying to find out what the future of cryptocurrencies and blockchain might hold. Countries such as China has come rejected the cryptocurrency industries while others, mostly territories and other small nation have welcomed it with an open mind. Each country is approaching this technology differently. It is almost guaranteed that in the upcoming year new legislation will come that will bring cryptocurrencies into the normal market.  

References