A Comparative Analysis of Bitcoin and other Decentralized Virtual Currencies: Legal Regulation in the People's Republic of China, Canada, and the United States
By Matthew P. Ponsford – Edited by Ann Kristin Glenster and Cristina Carapezza
Introduction
Bitcoin, also known as a decentralized virtual currency (DVC),[1] is regulated differently in the People’s Republic of China (PRC), Canada, and the United States, and represents a vastly underdeveloped area of the law. No country has currently backed Bitcoin. Launched in 2009, and founded by Satoshi Nakamoto,[2] Bitcoin is a “decentralized peer-to-peer currency.”[3] Other virtual currencies include Litecoin, Namecoin, Auroracoin, Peercoin, and Dogecoin – about 500 varieties in total – but research here will primarily focus on Bitcoin.[4] A comparative analysis will help discern how these respective countries classify Bitcoin (e.g., a virtual object, currency, or potential security), and how these jurisdictions regulate, or intend to regulate, DVCs. Bitcoin is identified as a “currency,” throughout the paper, but the classification is heavily contested. Questions for analyses include: are there appropriate existing legal frameworks to regulate Bitcoin? What securities regulation challenges does Bitcoin pose? What are the consumer and investor protection concerns associated with Bitcoin compared to traditional financial exchanges? What are the cross-jurisdictional challenges of virtual currency transactions that operate over the Internet (e.g., money laundering, or fraudulent activities)? Research herein incorporates securities commission reports, social and political commentary from secondary sources, and relevant jurisprudence and legislation. The paper helps situate the current climate of Bitcoin globally, and assesses how its regulation differs relative to technological, economic, social, financial, and political forces.
Background to Bitcoin
There are two types of e-money: one denominated in a national currency, such as PayPal balances and pre-loaded store-value credit cards (e.g., MasterCard or Visa), or the ubiquitous Octopus card in Hong Kong, all managed by a third party. The second, cryptocurrency (e.g., Bitcoin), is not denominated by any national currency. Transactions also occur without validation from a third party.[5] There are only 21 million Bitcoins in the world; 12 million are in circulation.[6] One inherent risk is the volatile fluctuation of Bitcoin, which is ten times more volatile than typical currencies.[7] For instance, in 2013 the price per Bitcoin went from $13 to $1000, and as of April 2014, the price was around $300, with a total estimated worth of $3.5 billion.[8] Bitcoin’s price fluctuates rapidly, and a limited population owns the vast majority of the currency: estimates suggest 47 people own approximately 30% of all Bitcoins.[9] A May 2014 report, issued by the United States Government Accountability Office (GAO), estimated 12.6 million Bitcoins in circulation with an exchange rate of $458 each, for a total value of $5.6 billion.[10] In addition to its speculative value, there remains debate if Bitcoin is a currency at all. No central authority controls Bitcoin, and there are currently no transaction fees during the payment process. Computer experts use the blockchain method of verifying transactions in the absence of a central authority.[11] Trades tend to be secure, but the storage of Bitcoin is not, posing concerns if there are valid securities interests in the digital currency.[12] For instance, 740,000 stored Bitcoins were lost on Mt. Gox (a Japanese Bitcoin exchange system).[13] A Bitcoin hacking incident also occurred in Edmonton, Alberta, Canada (March 2014), when Flexcoin, a Bitcoin bank, was robbed of roughly $654,000 worth of currency. Flexcoin subsequently announced it was shutting down.[14] Generally, virtual currencies raise larger consumer protection issues, especially because of greater anonymity in Bitcoin and other virtual currency transactions, compared to traditional financial exchanges.[15] The May 2014 GAO report reiterated concerns:
Because peer-to-peer bitcoin transactions do not require the disclosure of information about a user’s identity, they give participants some degree of anonymity. In addition, computer network communication can be encrypted and anonymized by software to further hide the identity of the parties in transactions.[16]
Note transactions are not perfectly anonymous – sometimes referred to as “pseudo-anonymous” – because the time and amount of each transaction is recorded in the blockchain.[17] The U.S. Department of Homeland Security (including the Secret Service), the Department of Justice, and the Securities Exchange Commission (SEC), have paid particular attention to these currencies because of potential money laundering activity, and cross-border criminal financing.[18] Other associated issues with Bitcoin include: difficulty in reversing transactions, vulnerability of virtual wallets (including irrecoverable theft),[19] lengthy time to process transactions (requiring Bitcoin validation of the blockchain sequence); computer hacking of the private component of the blockchain; and potential fraud, where consumers are promised a high percent interest rate of return on a Bitcoin investment.
In the U.S., SEC enforcement extends to virtual-currency-related securities transactions because when companies offer and sell virtual currencies, such as Bitcoin, they must register the offering with the SEC or qualify for registration exemption.[20] Tracking money laundering and other criminal activity is also challenging. The increased anonymity of Bitcoin and other virtual currency transactions means no personally identifiable information is exchanged between two individuals or a third-party intermediary.[21]A lack of consumer and investor protection is another emerging risk. Many users are unaware of the dangers, which include: (1) lack of bank involvement (e.g., no Canada Deposit Insurance protections as per most banks); (2) limits on recourse (compared to credit and debit cards that have no consumer liability for fraudulent activity); and (3) volatile prices of virtual currencies.[22]
The SEC’s Office of Investor Education and Advocacy has issued two investor alerts on virtual currencies, and the agency has started to review a registration statement from a company looking to conduct a public offering of virtual-currency-related securities.[23] In Canada, an internal Finance Department memo has also surfaced, which warned: “Virtual currencies such as Bitcoin have been criticized for their potential to fund illicit activity, such as money laundering and terrorist financing.”[24] The memo was addressed to Jim Flaherty, the former Minister of Finance. Although Bitcoin transactions will align with current anti-money laundering laws, containing a duty to report suspicious activity, Canadian regulation will be limited to ensure innovative development.[25] Presently, the Bank of Canada considers Bitcoin and other cryptocurrencies an investment product – not money. The Canada Revenue Agency also considers cryptocurrencies a commodity that suggests buying and selling Bitcoin is taxable income. Concerns were raised again recently (13 November 2014) in a speech from Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada, in which she outlined several jurisdictions’ plans for developing a new legal framework:
Canada has introduced legislation to require cryptocurrencies to register and to report suspicious transactions that may be linked to money laundering and terrorist financing. Regulators in the state of New York are proposing to issue a “BitLicense” to protect consumers, prevent money laundering, and enforce cyber security. Some countries, like China, have ruled that financial institutions cannot handle any Bitcoin transactions.[26]
Globally, it is estimated over 2.5 billion people lack access to bank accounts.[27] Cryptocurrencies offer these individuals a means to process transactions and micropayments. This convenience and innovation improves global socioeconomic equality, and narrows the digital divide, but digital currencies also pose many legal challenges, including cybercrime.
Country-Specific Practices
Before analyzing Bitcoin regulation or deregulation in three country examples, a chart below summarizes the highlights:[28]
|
Jurisdiction |
Regulated |
Taxed |
Banned |
|
China (PRC) |
Yes |
Yes |
Yes |
|
Canada |
No |
Yes |
No |
|
United States |
Unclear |
Taxed as Commodity |
No |
A. Digital Currencies and Legal Regulation in the People’s Republic of China (PRC)
China is currently the second-largest economy in the world.[29] China’s first attempt to regulate digital currencies included regulating coin, a currency which originated from an online video game and transitioned to real-world exchange of goods and services.[30] Later, China issued a complete ban in the wake of the popularity arising from Q coin use.[31] Most recently, Bitcoins remained outlawed and the ban was extended to Bitcoin transactions processed through financial institutions and third parties.[32] The People’s Bank of China does not provide Bitcoin with any legal status, refuses to recognize Bitcoin use as a currency, and remains concerned Bitcoin is not protected by a central authority. Before the ban, China accounted for the most Bitcoin exchanges, but now comprises only 7% of all transactions.[33] Alibaba has also complied with the ban on DVCs in January 2014.[34] Even though the actions of the Chinese government substantially curbed the worldwide virtual currency base,[35] shutting down Bitcoin use entirely has proved difficult.
China is lagging behind other jurisdictions that are taxing Bitcoin exchanges, without a wide scale ban. China is missing the opportunity to help develop and control a rapidly developing area of the law some have dubbed “smart contracts.”[36] This concept refers to written virtual script, or the blockchain, of the Bitcoin network. As a condition to validate a transaction, the script is computed, read, and verified – an emerging and developing area of information technology and contract law. The blockchain history is also stored, which reduces litigation and facilitates any necessary dispute resolution.[37]
The strict outlawing of Bitcoin in China has also created large and volatile Bitcoin price fluctuations in other jurisdictions and markets. The banning of Bitcoin has created heightened skepticism that influences the value of Bitcoins globally.[38] For example, in October 2013, an announcement that Baidu, a large online shopping platform in China, would accept Bitcoin payment created a large surge in Bitcoin value; two months later, in December 2013, the Chinese government banned Bitcoin payments, which conversely saw a huge drop in value.[39] In other words, the U.S. Bitcoin market valuation is directly correlated to the Chinese Bitcoin regulatory regime. It is suggested that new laws, regulations, and policies be devised to meet the demands of the innovative technology of Bitcoin.[40]
One criticism of China’s strict crackdown on Bitcoin is the state’s desire to control freedom of speech via the Internet. Bitcoin users who are also bloggers, outspoken activists, or “revolutionaries” can sometimes use Bitcoin as a means to fund web publishing or coordinated message broadcasting.[41] This new technology thus protects users’ identities while challenging the state’s policies and laws. In other words, dissidents have found Bitcoin payments convenient and safe from the “Internet police” when voicing anti-government views.[42] WordPress, a popular web-publishing platform hosting sixty million blogs, has recently announced acceptance of Bitcoin payments. This allows Chinese citizens challenging authorities to protect their identity via a secure payment method. However, the Chinese government has quickly adapted to these new regulatory and tracking challenges. The government is improving and prioritizing its oversight of websites utilizing Bitcoin as a payment method.[43]
The neutral position of the People’s Bank of China related to Bitcoin has quickly become hostile, with the Central Bank threatening to “censure” banks that do not cooperate with requests to crackdown on Bitcoin.[44] Strict regulatory controls have also created a turbulent and contentious relationship between the Central Bank and the country’s top five financial institutions. After the Bitcoin ban, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd., and Bank of Communications Co. allowed Bitcoin accounts in spite of the government’s previous warnings.[45] A May 2014 meeting coordinated by the Central Bank scolded senior executives of the big-five banks for their lack of oversight and cooperation. The banks were instructed to setup special groups to monitor potential Bitcoin account transactions. According to The Wall Street Journal, a notice sent to commercial banks on December 4, 2013 stated:
[…] the People's Bank of China said that domestic financial institutions couldn't conduct settlement or payments related to bitcoin. It also barred trust companies and fund-management firms from making bitcoin-related investments and advised insurers not to insure bitcoins.[46]
Commercial banks were also instructed to notify clients by May 10, 2014 of the new Bitcoin prohibitions. Despite these warnings, digital currency exchange companies are already identifying creative avenues to circumvent the government’s strict regulations. One example is BTC China’s installation of a Bitcoin ATM in Shanghai and the company’s launch of an online buy-and-sell app. BTC’s ATM is not connected to China’s commercial banks.[47]
Although financial institutions are strictly forbidden from engaging with Bitcoin, as of June 2014, no Chinese laws explicitly state that a citizen is unable to own Bitcoin.[48] The Chinese government’s conflicting positions have caused great frustration and confusion for Bitcoin users both within and outside the country. For instance, on December 3, 2013, the People’s Bank of China defined Bitcoin as a “virtual good.” However, financial and payment companies, as well as third-party processors, were forbidden from supporting Bitcoin. Bitcoin exchanges were also required to register with the Ministry of Industry and Information Technology. In addition to the Ministry of Industry and Information Technology, the December Bank Notice [2013] No. 289 was jointly released by the People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, and the China Insurance Regulatory Commission. The statement read (in part):
It is required that, at this stage, financial and payment institutions may not use Bitcoin pricing for products or services, may not buy or sell Bitcoins, may not act as a central counterparty in Bitcoin trading, may not offer insurance products associated with Bitcoin, may not provide direct or indirect Bitcoin-related services to customers, including: registering, trading, settling, clearing or other services; accepting Bitcoin or use of Bitcoin as a clearing tool; trading Bitcoin with CNY or foreign Bitcoin-related financial products; and using Bitcoin as a means of investment for trusts and funds.[49]
Websites serving as Bitcoin trading platforms were also instructed to register with the Telecommunications Bureau, in accordance with the Telecommunications Regulations of the People’s Republic of China and the Internet Information Services Managing Guidelines, and to comply with PRC’s Anti-Money Laundering Law.[50] A Spokesperson for the Central Bank commented on the possibility of additional regulatory measures, stating (in part):
[…] ordinary people have the freedom to participate [in buying and selling Bitcoin], provided they assume the risks themselves. Next, the People’s Bank will work with the relevant ministries to supervise the financial institutions, payment institutions and websites that provided Bitcoin registration, trading and other services […] the People’s Bank will continue to pay close attention to the movements of Bitcoin and associated risks […][51]
On January 31, 2014, BTC China, the largest global Bitcoin exchange, continued to accept yuan deposits. Later, on March 21, 2014, following rumors circulating in the media, all banks were instructed to close Bitcoin exchanges.
According to Jonathan Turpin, outlawing Bitcoin entirely, as China has rapidly done, is not a recommended approach for three reasons: (1) the vast majority of countries globally have not made Bitcoin illegal through legal regimes; (2) there are significant economic benefits to regulating Bitcoin use for both the financial market and consumers; and (3) currently, the Bitcoin network is very difficult to target, and most governments, including China, do not have the capability to mitigate this challenge.[52] Outlawing DVCs is not the most effective approach to combating potential crime associated with this new technology. Legislation can assist the Chinese government in regulating Bitcoin without the need to outlaw DVCs entirely. Existing legal frameworks could also be adapted to control new and rapidly expanding DVCs without the need to devise new laws.
It is clear that the Chinese government’s evolving position on Bitcoin regulation continues to be a very timely and recent development. In 2015 the government may propose other measures if the current crackdown is not effective. In the meantime, little information beside the December 5, 2013 news release and March 21, 2014 ban is available to the public or other country’s governments interested in China’s regulatory position.
B. Canadian Regulation of DVCs and Federally Proposed Legislation
As discussed in the introductory remarks, Canada considers Bitcoin more of a commodity than a currency, and has a similar tax approach mentality to China before the countrywide ban. The Canadian Mint has recently prepared to test Canada’s own digital currency, coined MintChip, a project that began in April 2012.[53] In this project, unlike with Bitcoin, the Royal Canadian Mint had the direct support of the federal government. MintChip creators have lauded the new digital currency, dubbing the creation the “future of money,” for its potentially low-cost operations and innovative alternative to traditional currencies. The need to replace physical coins and bills is reduced. Another advantage is lower costs for consumers, who pay $5 billion per year in a 3% credit card use fee.[54] Additionally, users would not need a bank account or impressive credit score rating.[55] The success of the MintChip project seems premised on businesses’ and merchants’ acceptance levels to the new digital currency, and the public’s interest level and consumer demand. A major milestone was reached with MintChip’s first “proof-of-concept implementation,”[56] but the mint has now decided to sell the business to the private sector.[57]
Canada was also the first jurisdiction in the world to introduce concrete legislative measures to regulate Bitcoin. Bill C-31[58] legislation received royal assent on June 19, 2014, which included sections establishing reporting requirements of DVCs and Bitcoin, similar to the regulation requirements of other financial transactions. The new laws regulate Bitcoin as a money services business, requiring registration with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), suspicious activity report submission, record keeping, and strict compliance protocols. The Bitcoin regulations apply to domestic and international Bitcoin operators. Controversy exists as new reporting requirements may prove onerous and hinder innovation, especially at a time when the Royal Canadian Mint is attempting to sell off MintChip for further private-sector development. The summary of Bill C-31 stated (in part):
Division 19 of Part 6 amends the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to, among other things, enhance the customer identification, record keeping and registration requirements for financial institutions and intermediaries, refer to online casinos, and extend the application of the Act to persons and entities that deal in virtual currencies and foreign money services businesses [emphasis added].[59]
Legislation that specifically altered the definition of money services business stated:
(4) If subsection 256(2) comes into force, then on the latter of January 1, 2015 and the day on which that subsection comes into force, ... “money services business” means an entity ... (iv) dealing in virtual currencies, as defined by regulation ....[60]
Other legislative provisions[61] incorporated virtual currency language as well, including foreign businesses directing services at a Canadian person or entity. Overall, the enacted legislation is a significant development because it: (a) regulates DVCs as a money services business; (b) does not specify the meaning of “dealing in virtual currencies”; (c) imposes FINTRAC registration, subsequently requiring an anti-money laundering regime after successful registration; (d) extends to entities both inside and outside Canada, or services directed at individuals in Canada (but does not extend to services directed at entities outside Canada); and (e) prevents banks from managing money service businesses not registered with FINTRAC.
C. United States Regulatory Challenges Following China’s Bitcoin Ban
77% of all conversions of Bitcoin to a denominated currency are for the U.S. dollar. Federally, the U.S. does not officially consider Bitcoin a currency, although a Federal District Court in Texas and the U.S. Department of Treasury do.[62] The country also has a constitutional guarantee to monopolize the production and management of its national currency. The trend appears defining Bitcoin as a currency given the wide Internal Revenue Service (IRS) tax implications associated with its use.[63] Like other jurisdictions, tax evasion, along with money laundering, and buying and selling contraband, remain concerns.
The Silk Road Website was an infamous case of an online black market which sold narcotics, forged documents, and other illegal services, using Bitcoin currency.[64] The U.S. FBI arrested the mastermind and uncovered almost one million registered users who used approximately 9.5 million Bitcoins (worth $1.2 billion at the time).[65] In order to solve the many complex legal issues associated with Bitcoin, the author of a recent article suggests outlawing the currency entirely, similar to China’s approach, and devising a virtual currency regulated by a central authority.[66] It is estimated over 75% of all Bitcoin-to-U.S. currency transactions occur through three main Bitcoin exchanges. If those exchanges were shut down, the volume of transactions would decline substantially, as experienced in China. Removing intermediaries who exchange Bitcoins for goods, and prosecuting individuals similar to what was done to combat illegal music sharing, is also proposed as a viable solution. Disintermediation also poses significant consumer risks, such as fraud, in the absence of a functional regulatory legal regime.[67]
The challenges Bitcoin poses for the U.S. is akin to the case of A&M Records v Napster Inc,[68] where Napster used a decentralized network of users to disseminate illegal, copyrighted works. The court quickly shutdown the site.[69]In the United States, there is currently no consensus on what constitutes a decentralized virtual currency. A clear definition should be constructed in order to enforce the ban through one of the federal agencies.[70] In the interim, the U.S. government has stated that those engaging in Bitcoin transactions must comply with the U.S. Bank Secrecy Act, 1970 (BSA),[71] the country’s anti-money laundering legislation. Similar to Canada’s FINTRAC registration requirements, the BSA becomes applicable to all money-services businesses,[72] established by the Financial Crimes Enforcement Network (FinCEN).[73]
Child exploitation may seem a surprising implication of the prevalence of DVCs, but U.S. authorities and the International Center for Missing and Exploited Children (ICMEC) have expressed concern that the new digital economy, including DVCs, has contributed to the commercial exchange of sex abuse images, child pornography,[74] and sex and human trafficking.[75] DVC payments sometimes facilitate access to child pornography. The U.S. has also held numerous Congressional hearings[76] and, in early 2012, the FBI formed the Virtual Currency Emerging Threats Working Group (VCET). The VCET coordinates and helps combat other crimes associated with DVCs across a number of state and federal government departments, and international law enforcement agencies.[77]
Another unexpected implication of Bitcoin’s popular use centers on the U.S. political process, campaign contributions, and election laws.[78] In November 2013, the Federal Election Commission (FEC) released a decision declaring that Bitcoins were not considered money and could not be accepted as campaign contributions.[79] Since then, in May 2014, the FEC announced Bitcoin contributions could be reported as “in-kind” contributions toward political action committees (PACs).[80] The official twenty-page memorandum stated (in part):
The Commission further concludes that the requestor may purchase bitcoins with funds from its campaign depository for investment purposes but may not make disbursements using those purchased bitcoins because Commission regulations require the committee’s funds to be returned to a campaign depository before they are used to make disbursements.[81]
The memo also provided in-depth legal analysis and strict reporting requirements for Bitcoin donations, including rules about receipts, Bitcoin deposits, investments, and refunds.[82]However, concerns remain that the use of Bitcoins in the political process could mean certain donations are untraceable, given the anonymous nature of DVCs. The FEC allows individuals to give a maximum donation of $100 worth of Bitcoins per political campaign, the current maximum equivalent to cash donations. Other in-kind donation limits, in the forms of cheques, bonds, office supplies, computers, and other types, are considerably higher.[83]
Money Laundering, Criminal Activity, and Terrorist Financing
Information technologies such as the Bitcoin exchanges, which facilitate virtual currency transactions and exchange from Bitcoin to denominated currencies, have posed unprecedented challenges for law enforcement personnel. Canada seems to be a leader in this area with the enactment of Bill C-31.[84] After all provisions come into force, DVCs will be considered money service businesses. This means suspicious financial transactions – or attempted suspicious transactions – potentially involving money laundering or terrorist activities, must be reported, irrespective of the transaction amount. Single transactions involving $10,000 or more must also be reported. Businesses must confirm funding sources from money transfers sent or received internationally of $100,000 or more, to or from a suspected “politically exposed person” (PEP). PEPs comprise one of three categories: foreign, domestic, or the head of an international organization. Money service businesses must complete regular risk assessments to identify anti-money laundering control weaknesses and help mitigate those risks and vulnerabilities. A compliance regime is mandated, including a designated compliance officer, adequate financial resources and staff, client identification procedures, terrorist financing and property identification protocols, a procedure for reviewing the compliance regime, and a comprehensive record-keeping system.[85]
The U.S. remains particularly concerned that Bitcoin will pose added challenges to combating terrorism. The exchange of money via the Bitcoin network is seen to attract cybercriminals which makes the detection of illicit funding difficult.[86] If adequate controls are not implemented, terrorist groups may successfully finance their illegal operations in the U.S. or elsewhere.[87]
International Coordination of DVCs Regulation
Bitcoin and DVCs pose jurisdictional challenges in the context of transnational crime.[88] Law enforcement often faces difficulty in obtaining customer transaction records. The process is slow even with cooperative jurisdictions. The personal jurisdiction of defendants accused of illegal activity associated with DVCs will also continue to present difficulties in combating this new form of cybercrime.[89]
The challenges of regulating Bitcoin are larger than the separate domestic regulations discussed previously in China, Canada, and the U.S. In fact, inconsistencies in regulation have posed many challenges for jurisdictions currently attempting to mitigate regulatory deficiencies. For example, Germany does not currently require registration for buying, selling, or exchanging Bitcoin.[90] U.S. regulation through the Treasury Department and between states means there are state-level inconsistencies in regulation, which may drive users to possess and exchange Bitcoin in states with the lowest regulatory burden.[91] Germany and Canada also do not collect information about users engaged in Bitcoin transactions, which means the U.S. cannot benefit from the data nor can other interested jurisdictions.
Revenue and tax implications have also exposed inconsistencies. For instance, the European Commission and European Union have not clearly established the legal status of Bitcoin,[92] although the European Central Bank released a preliminary report in October 2012.[93] The European Commission’s E-money Directive does not encompass Bitcoin currency.[94] The United Kingdom issued a Revenue & Customs Brief on March 3, 2013, outlining levied taxes for Bitcoin-generated income.[95] Canada, Germany, and the U.S. seem united with the U.K.[96] in emphasizing that Bitcoin transactions are taxable. It is thought that prosecuting Bitcoin users for tax evasion may be the best and most effective international approach to combat and regulate DVCs.[97]
Conclusion and Future Developments
As one scholar stated: “the international regulatory landscape for Bitcoin is a patchwork of inconsistent and incomplete attempts to counter criminal abuse of the technology.”[98] Jonathan Zittrain, writing in the Harvard Law Review, states:
Cyberlaw’s challenge ought to be to find ways of regulating — though not necessarily through direct state action — which code can and cannot be readily disseminated and run upon the generative grid of Internet and PCs, lest consumer sentiment and preexisting regulatory pressures prematurely and tragically terminate the grand experiment that is the Internet today.[99]
Technological progression and Internet governance has left many countries conflicted in how best to manage Bitcoin and other DVCs. In China, Canada, and the U.S., a growing consensus is that DVCs pose many economic and criminal regulatory concerns, despite venture capitalist investments in Bitcoin expected to total $300 million by the end of 2014.[100] Currently, the U.S. and Canada are the primary investment platforms. China could once again become a large investment center for Bitcoin if the government reverses its decision to outlaw the currency and instead regulate DVCs more strategically. Turpin again recommends against taking a hostile approach toward regulation since the anonymity of the network poses challenges in identifying users.[101] A creative approach to regulation is much more effective. However, tax liability and tax enforcement, as well as competition with national, centrally regulated currencies, are also major concerns, given the decentralized nature of digital currencies.
No standard or internationally coordinated framework regulating DVCs exists, and regulatory efforts are exacerbated by inter-jurisdictional challenges. Political, financial, social, and economic forces in China, Canada, and the U.S. also contribute to the countries’ regulatory and legal frameworks. The approach taken to regulate Bitcoin and other DVCs must be tailored to the circumstances and challenges of each jurisdiction. Unfortunately, today, political agendas can mask otherwise innovative technological development, under the guise of national security,[102] and attempts to combat money laundering,[103] terrorism, and cybercrime. Reducing anti-money laundering and other criminal activities Bitcoin technology facilitates will remain a priority. Areas requiring further knowledge include: potential for ongoing theft of virtual currencies compared to physical currencies; counterfeiting of Bitcoin and other DVCs; the possibility of Bitcoin loans; and if the potential threat that Bitcoin may pose to global currency markets.[104] Over the next decade, a more coordinated regulatory effort may be necessary, which could include discussions at the World Economic Forum or the United Nations. The challenge is striking a balance between developing comprehensive and effective criminal and financial regulatory regimes and policies, while limiting impediments to technological innovation and growth.
Matthew P. Ponsford is an LL.M. Candidate at McGill University, Montréal, Québec, Canada.