Following the federal government’s invocation of the Emergencies Act, Deputy Prime Minister Chrystia Freeland border temporary regulations on financial institutions that would require surveillance of all “forms of transactions, including digital assets such as cryptocurrencies” related to the blockade. The focus on cryptocurrencies was likely sparked by the success of Honkhonk Hodl Bitcoin. fundraising campaign for the Liberty Convoy. Regardless of what you may think about the convoy, this development has shown that Canadians are paying attention to cryptocurrencies. And now, so is Ottawa.
Freedom convoy aside, not only can regulators view Bitcoin and other cryptocurrencies through a nefarious lens. These events demonstrate 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 submitted a bill to open Canada’s institutions to cryptocurrencies. The bill would require the government to coordinate with industry experts to draft a framework to help grow the sector in Canada. Since the arrival of Bitcoin in 2008, digital assets have catapulted into a very dynamic sector by value $2 billion. Whether it is exchanges, decentralized finance, or lightning payments, there is no doubt that Bitcoin and other cryptocurrencies represent a new paradigm and opportunity.
Legislation like Rempel Garner’s could ensure that the industry ecosystem is protected from overzealous regulation, but only if we enact smart, focused, targeted regulations that don’t destroy the industry outright.
Any institution that touches digital assets must have clear guardrails that provide legal certainty. That means no extra red tape when it comes to 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 onerous enforcement actions just because cryptocurrencies are involved.
Failure to follow these steps risks pushing crypto activity into the black market or seedy jurisdictions, where rules and regulations will not be followed. The history of Prohibition or the Global War on Drugs, which have fueled criminal and black market activity, provides an example.
Technological neutrality must be a fundamental principle of any legislation, which means that governments must 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 allow innovation, competition, and consumer choice to make that determination.
Whether it is algorithmic mining (Proof of Work), interest-bearing accounts, or easy payments, users and entrepreneurs are testing and adopting best practices for the crypto future. If the government endorses one method or outlaws another, due to environmental, financial, or legal concerns, it risks betting on the wrong horse and stifling innovation.
Another important aspect of future regulation is moderate taxation. In Estonia, for example, cryptocurrencies are considered real estate 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.
In general, regulators should not pigeonhole cryptocurrencies only as tax-eligible investments. These are technological tools that empower consumers and encourage innovation. A single class of crypto assets, separate from traditional securities, could also help users benefit from the decentralization and encryption offered by these projects while ensuring broader financial adoption.
The Rempel Garner bill is a step in the right direction, but it is important that what comes out of it focuses on these core issues. Otherwise, Canada, Canadian consumers, and domestic entrepreneurs will be sidelined.
David Clement and Yaël Ossowski are the Manager of North American Affairs and Deputy Director of the Consumer Choice Center.