Canada announces regulation of bitcoin, digital currencies and Internet gambling sites under anti-money laundering laws

By Christine Duhaime | February 11th, 2014

Federal government to regulate bitcoin and other digital currencies

As was widely anticipated, the federal government announced today that it will amend federal legislation to require the regulation of digital currencies like bitcoin in order to eliminate the potential risks of digital currencies being used for terrorist financing and money laundering.

Interestingly, the proposed legislation will aim at eliminating, rather than reducing the financial crime risks, which suggests that businesses involved in the exchange of bitcoin will become “reporting entities” under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA“), similar to money services businesses, and accordingly, will be required to be registered by the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC“) and comply with the reporting requirements under the PCMLTFA by, inter alia, monitoring and reporting suspicious transactions and implementing compliance regimes based on site specific risk assessments.

The announcement was made as part of Canada’s 2014 federal budget released today. Bitcoin and other digital currencies were identified as “emerging risks that threaten” anti-money laundering and counter terrorist financing efforts in Canada.

Although few details have been provided, Canada said it would remove the anonymity associated with bitcoin and other digital currency transactions that have any connection to Canada.

Canada not a bitcoin “wild west” 

Earlier in 2013, FINTRAC reportedly issued letters to several bitcoin exchange businesses that expressed the position that the PCMLTFA did not apply to their operations. If such opinions exist, they appear inconsistent with both the PCMLTFA and provincial Securities Acts which, by definition, make bitcoin a securities and therefore subject to that legislation as well as the money services businesses provisions under the PCMLTFA, particularly in respect of bitcoin issued by ATMs.

The content of the letters reportedly from FINTRAC were widely published by bitcoin advocates online and provided to the media, resulting in headlines that Canadian regulators were “welcoming bitcoin” when other G8 countries were taking regulatory enforcement action against digital currencies over money laundering and terrorist financing concerns, as well as consumer protection concerns. A Canadian law firm subsequently published advice on the topic of bitcoin and the PCMLTFA that bitcoin was not subject to regulation and Canada was somewhat of a “wild west” environment.

Contrary to the foregoing, Canada is not the “wild west” – bitcoin exchanges and transactions have always been subject to a variety of regulations in Canada, both federally and provincially. The only issue has ever been the extent to which such transactions trigger the registration requirements under the PCMLTFA for money services businesses.

The Quebec government takes the position that bitcoin ATMs, for example, are governed by the Securities Act, the Derivates Act and the Money Services Businesses Act and it has expressed an intention to prosecute violations in respect thereof involving bitcoin.

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