- The digitalization of the economy is growing at a phenomenal rate, impacting and challenging the way we conduct financial transactions. If the spread of digital technology in finance and rising prosperity continues, the global flows will triple by 2025, boosting economic growth. (McKinsey Global Institute Report, 2014.)
- Digitization of the financial sector is transformative because it reduces costs of services and distribution and creates purely digital financial products and services, some of which are entirely new, and others of which may not be new but are delivered on international digital platforms that are new. These technological changes create significant opportunities for new financial technology for Canada, and many new opportunities for governments and companies to drive growth and innovation, opening the door to greater participation by entrepreneurs.
- These changes put pressure on governments to consider how their economies should participate and how they can and should enable participation through the right business environment and regulation, and ways in which they can capitalize on the global shift to digital finance. There will need to be new investments and focused policies to embrace the increasing digitization of finance and the consideration of a wide-range of untested issues.
- Currently, there are no global regulatory regimes or regulatory infrastructures that address digital finance, including how machine-to-machine digital financial transactions will be regulated in the ‘Internet of Things’ world. Canada has an opportunity to step in and take a leadership role in this area.
Key points captured in the 2015 Canadian Standing Senate Committee on Banking, Trade and Commerce (#BANC) report “Digital Currency: You Can’t Flip This Coin”
The use of cryptocurrencies has resulted in a range of opportunities, including:
- Using blockchain technology to allow individuals to control and manage their security and online identity;
- Reducing the need for intermediaries in the payments system that enables lower transaction costs; and
- The potential to bring financial services to developing countries.
Key recommendations from the report
Recommendation 1: The federal government, in considering any legislation, regulation and policies, create an environment that fosters innovation for digital currencies and their associated technologies. As such, the government should exercise a regulatory “light touch” that minimizes actions that might stifle the development of these new technologies.
Recommendation 2: The federal government consider the use of blockchain technology when advantageous to deliver government services and to enhance the security of private information.
Recommendation 3: Digital currency exchanges, the “on and off ramps” of the digital currency system, be defined as any business that allows customers to convert state-issued currency to digital currency and digital currencies to state-issued currency or other digital currencies. To minimize the risks of illegal activity in relation to Canada’s anti–money laundering and anti–terrorist financing laws, the federal government should require digital currency exchanges, with the exclusion of businesses that solely provide wallet services, to meet the same requirements as money services businesses.
Recommendation 4: The federal government, on an active and ongoing basis, work with other countries to formulate global guidelines for digital currencies while respecting the “light touch” premise outlined in Recommendation 1 above.
Recommendation 5: The Minister of Finance convene a roundtable with stakeholders, including banks, to look for solutions to the lack of access to banking services for digital currency related businesses, while recognizing the requirements of Canada’s anti–money laundering and anti–terrorist financing regime.
Recommendation 6: The federal government, through appropriate federal entities, provide concise information to the public about the risks of digital currencies and alternative payment systems.
Recommendation 7: The federal government, through the Canada Revenue Agency, provide concise information to Canadians about the tax obligations of digital currencies when received as income, held as an investment, or used to purchase goods or services.
Recommendation 8: Due to the evolving nature of digital currencies, the Standing Senate Committee on Banking, Trade and Commerce review this study of digital currencies and their associated technologies to assess the appropriateness of the regulatory environment in the next three years.
Core proposals fromDigitalFutures incorporated in the report in support of the above recommendations include:
- DigitalFutures suggested that regulations for digital currencies should not be implemented until Bitcoin’s technology, and its potential applications, are better understood.
- Governments should make investments and create policies that would support the development of digital finance technologies.
- Support the development of new technologies in the financial sector, such as purely digital financial products and their delivery through international digital platforms, reduces the cost of financial services and their delivery.
- Use cases such as M-PESA’s success in Kenya shows that new technologies in digital finance, including cryptocurrencies, have the potential to increase access to financial services for those who are “unbanked” or excluded from financial markets. DIGIFIN also noted that, according to a World Bank report, these individuals are mostly women.
- DigitalFutures stated that there is a risk that over-regulation could lead Bitcoin-related businesses to leave the regulated banking system, either voluntarily or because financial institutions do not provide services to them because of concerns about contravening anti–money laundering and anti–terrorist financing laws; these businesses could turn to the “underground banking system,” where transactions are not monitored or reported. It supported an approach to regulating Bitcoin that would ensure that banking services are provided to Bitcoin-related businesses, and that transactions by these businesses are monitored and reported pursuant to Canada’s anti–money laundering and anti–terrorist financing regime.