Canadian Economists: Bitcoin Needs Flexible Regulation to Thrive

May 29, 2014 at 11:28 UTC
Updated May 18, 2015 at 16:41 UTC
NEWS

The Montreal Economic Institute has published a research note on bitcoin in which it concluded that the digital currency’s future hinges upon its legal status.

The institute argues that retailers, consumers and investors need to know that a clear set of rules governing bitcoin is in place. Such rules would bolster confidence and boost adoption, while at the same time speeding up investment in bitcoin companies.

However, “the proposed rules must not hamper the use of bitcoin as a means of exchange, either with burdensome taxes or with excessive administrative rules for users,“ the institute points out.

Canada benefits from bitcoin

The researchers found that Canada is the second most popular destination for venture capital invested in bitcoin firms and that the country benefits from jobs and economic activity generated by the new industry.

Canadian legislators are already working on amendments to existing financial legislation, which would better address risks associated with digital currencies.

“If these changes materialise, this clarification of rules would be a positive development for bitcoin in Canada. Among other things, it could facilitate interaction between banks and bitcoin companies,” the institute concluded.

Regulation elsewhere

The situation is somewhat different in other countries, such as the US and Germany.

Some US legislators are very open to the idea of digital currency, while others are not. However, legislative efforts are under way, spearheaded by New York State’s Department of Financial Services (NYDFS), which is planning to regulate the bitcoin space through so-called BitLicences.

Germany was one of the first countries to regulate bitcoin and it is considered open to digital currencies. Local regulators view digital currencies as a financial instrument similar to international currency, which means it can be used to carry out certain transactions even without being considered legal tender.

“Germany also stands out from other countries by the clarity of its rules. The various commercial activities that use bitcoins are regulated very specifically,” the researchers found, continuing:

“By reducing uncertainty regarding the regulatory implications of bitcoin, the authorities make it easier for companies to make decisions and encourage the creation of business partnerships like the one between Fidor and bitcoin.de.”

Acceptance not recognition

The institute believes bitcoin can fully realise its potential and move toward mainstream adoption only after a clear regulatory framework is put in place, along with some kind of governmental acceptance.

Government acceptance does not imply official recognition of bitcoin as a currency or legal tender, it says, but rather that bitcoin’s fiscal status will not prevent it from being used in a similar manner to a currency.

“So far, Germany seems to have done the best job of meeting these two criteria,” the researchers say, although Canada is taking a similar approach and could catch up.

China and Russia, which have both responded negatively to the perceived threat of bitcoin, are cited as examples of what not to do.

New York’s BitLicence scheme is viewed as a generally positive step. However, the institute remains cautious and believes that the programme needs to be evaluated.

Over-precise rules can also have their drawbacks, it says, due to rapid evolution in the bitcoin space. Therefore any rules governing digital currencies need to remain flexible and adaptable to the fluid nature of the industry.