Digital currency dealers grapple with financial rules
In this April 3, 2013, photo, software engineer Mike Caldwell holds a Bitcoin token at his shop in Sandy, Utah. (AP Photo/Rick Bowmer)
The Canadian Press
Published Sunday, April 28, 2013 11:38AM EDT
OTTAWA -- Canadians buying and selling an emerging digital currency are running afoul of established banks and operating in uncharted territory for financial regulators.
"The Canadian government doesn't know what a Bitcoin is, doesn't recognize the Bitcoin, and there's no regulatory agency that knows what a Bitcoin is," said Joseph David, the owner of VirtEx.
His Calgary-based website lets Canadians trade Bitcoins through an online market similar to a stock exchange. David said the two-year-old company facilitated $15 million in transactions this year.
But the company is one of several Bitcoin dealers struggling to navigate financial regulations that don't account for virtual currencies, and to cope with major banks shutting down their accounts without explanation.
Unlike traditional currencies such as the dollar, Bitcoins are not issued by a central bank, nor backed by a government. The virtual currency is governed by a computer program that allows users to exchange Bitcoins anonymously through a peer-to-peer network.
Computers solve complex algorithms to verify transactions. And to prevent fraud, every Bitcoin trade is made public.
The total value of all Bitcoins in circulation is about $1.5 billion, though the value has fluctuated wildly in recent weeks.
Online retailers such as blogging platform Wordpress and social news site Reddit accept Bitcoins from customers, using it as a free alternative to PayPal or credit cards.
David said VirtEx has hired a sales force that will pitch these benefits of Bitcoins to online merchants in Canada.
But the campaign to persuade more Canadian retailers to accept Bitcoins is already facing its first hurdle -- getting banks to accept that the currency has legitimate uses.
Earlier this month, the Royal Bank of Canada closed VirtEx's account, along with the bank account of an Ottawa-based Bitcoin dealer.
"Anti-money laundering policy is a big thing, and that's what banks are concerned about," said James Grant, the owner of Canadian Bitcoins in Ottawa.
"Our problem is that we're not laundering money."
Tens of thousands of dollars were flowing through Grant's RBC account, which the company was using to make direct deposits to customers who were buying and selling Bitcoins.
Grant said the bank refused to tell him why they were closing the account, but he suspects they shut it down when they realized it was a Bitcoin business.
"It definitely crippled us," Grant said.
It wasn't the first time a bank had closed their account. Earlier this year, the company lost its TD Canada account, which was cancelled without explanation.
Grant said it's a problem he expects will come up with the other banks he deals with. He's trying to strengthen the operation's legitimacy by requiring identification from customers and reporting large transactions, as required by regulations governing a money service business.
"We have invoices, and receipts, and customer documentation for every customer that we deal with," Grant said.
RBC refused to comment on the case for privacy reasons.
Bitcoin advocates argue that the lack of institutionalized oversight is one of the biggest strengths of the new currency.
"It fixes so many problems with our financial institutions, with the finance system," said Anthony Di Iorio, the founder of the Bitcoin Alliance of Canada, an advocacy group.
"It's not controlled by any one person or any group. You can easily transfer from one to one, anywhere in the world, instantaneously."
In the past Di Iorio has invested in real estate and precious metals, but he said Bitcoin is the payment system of the future because it gives online merchants a cheaper way of transferring funds.
Di Iorio owns several hundred Bitcoins, which are currently valued at about $140 each. He says he's confident that value will only continue to increase.
What's less clear is the tax implications of holding on to a digital asset, something Di Iorio says he's talking over with his accountant.
The Canada Revenue Agency does not recognize a Bitcoin as a unit of legal tender. Instead, the CRA says purchases with Bitcoins are considered barter transactions, and should be reported as income.
"When Bitcoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer," said Philippe Brideau, a spokesperson for the CRA.
VirtEx charges GST on all Bitcoin transactions, a proactive move David says is necessary to establish the fledgling currency's legitimacy.
"You could take one road on this and say, 'Because they're not regulated or defined, I'm not going to claim any capital gains or I'm not going to claim anything to the government,"' David said.
"Or you could take the high road and say, 'Just like anything has capital gains and losses, so does Bitcoin."'
Bitcoins have already caught the attention of federal regulators in the United States. In March, the U.S. Treasury's Financial Crimes Enforcement Network outlined the rules for buying and selling virtual currencies, making it clear that Bitcoin dealers are subject to existing rules that govern financial transactions.
But the Canadian counterpart is still trying to determine whether Bitcoins fall under existing financial regulation.
"We're looking at it, in terms of the application of the law," said Peter Lamey, a spokesperson for the Financial Transactions and Reports Analysis Centre.
Regardless, Canada's Bitcoin dealers say they will do their best to play by the rules.
"Even though the government's not ready for it, I think it's our responsibility -- the exchange's responsibility -- to be ready for it," David said.