Weighing privacy against risks involved with cryptocurrency trends
September 21, 2017
There is a delicate balance between what the government wants to know, and the privacy of Canadian citizens. Especially when it comes to money.
Individually, our privacy is important. Collectively however, it is to our advantage that the government understands what is happening in order to regulate commercial activity.
Technological advancements have provided new options for commerce, but some of those technological advancements are giving Canadian regulators a headache.
You’ve heard of the popular expression ‘the underground economy’ — the sale of goods and services not reported to the government.
The main motivation of those participating in the underground economy is to avoid paying sales tax and income tax. This is a significant loss of revenue not only for Canada but for many other countries as well.
Now another challenge facing us is underground currency. Cryptocurrency, such as Bitcoin, is a relatively new digital currency that makes it impossible to leave a paper trail for financial transactions.
Cryptocurrency uses blockchain technology and cryptography for secrecy and security. Blockchain technology allows data and assets to be distributed online between consumers and suppliers without the need for a third party, such as a bank.
One reason Canada wants to monitor financial transactions is to protect against money laundering, terrorist financing, and other fraudulent activities. As cryptocurrency isn’t issued by any central authority, it’s free from government monitoring.
FINTRAC is our Canadian financial intelligence regulatory body. Its formal name is the Financial Transactions and Reports Analysis Centre of Canada, and it assists in the detection, prevention, and deterrence of money laundering and the financing of terrorist activities.
FINTRAC is concerned that cryptocurrencies allow for significant financial transactions without it being able to monitor and regulate those transactions.
Terrorism is now a global risk, and terrorist organizations need capital to finance their operations. Currently, Canadian reporting entities are required to report large or suspicious cash transactions to FINTRAC.
Cryptocurrency transactions are direct. They do not require a third party. Not having a reporting entity involved in financial transactions, or being able to monitor cryptocurrencies being transferred, would undermine any efforts designed to cut off terrorist funding.
Cryptocurrencies are also under investigation from a number of groups in Ottawa responsible for monitoring the ebb and flow of money used for investments.
Individuals are better protected if regulators are able to monitor all financial transactions. Without that ability, Canadian regulators will not be able to do their job.
The irony is that cryptocurrencies leave an extremely detailed history of all transactions in an encrypted digital leger. Unfortunately, the regulators do not have the technology to read that history. It is clear that our regulators have to catch up with the current technology.
When cash is used in the underground economy it is extremely hard to trace. If regulators develop the necessary technology, they may find that monitoring cryptocurrency transactions, and reducing the risk involved in those transactions, is easy.