The Canadian Senate Banking, Trade and Commerce committee issued a report Friday encouraging "a light regulatory touch almost a hands-off approach" to regulating digital currencies.
Notably, the report calls for the minister of finance Canada's equivalent of the U.S. Treasury secretary to work with banks to find "solutions to the lack of access to banking services for digital currency-related businesses." While regulators worldwide have urged banks not to "derisk" by cutting off entire industries or geographies, it is rare for policymakers to specifically cite this controversial sector as wrongly underserved.
"The Senate Banking, Trade Committee is the most influential in Canada," said Christine Duhaime, a Canadian anti-money-laundering and counterterrorism financing lawyer. "The Senate Committee members have said privately that they intend to ensure that the government takes their report seriously and acts upon it. I believe them."
The overall tone of the Canadian Senate report is remarkably friendly to a young industry accustomed to more reactive and even defensive government measures against the money laundering and national security risks posed by an emerging technology.
"Canada's proposed 'light-touch regulation' is taboo among many regulatory bodies in the U.S.," said Marco Santori, legal counsel at Pillsbury Winthrop Shaw Pittman. "But we have seen that approach in the U.K. and we are seeing it develop in New Jersey as well."
He lauded the Canadian lawmakers for taking the time to do appropriate research before acting. "I believe that this kind of regulatory reconnaissance will pay dividends in the form of smart, long-lasting policy when it is ultimately developed."
In substance, however, many of the report's recommendations are familiar to those who have watched regulation of digital currencies develop in the U.S.
Among the eight recommendations in the report, the committee urged that digital currency exchanges, where customers buy and sell bitcoin and other cryptocurrencies for fiat money, be regulated like money-services businesses, to minimize laundering risks. However, firms that only host digital currency wallets and do not touch fiat shouldn't be subject to such regulation, the report said.
"It leads with the concept of a light regulatory approach, but they're pretty much endorsing the same steps that have already been taken in the U.S. with respect to on- and off-ramp regulation, AML compliance, tax obligations," said Carol van Cleef, a partner at Manatt Phelps & Phillips.
Derisking the global phenomenon of banks' severing relationships with wide swaths of clients, which has affected Bitcoin startups along with other industries is perhaps the most important issue addressed in the report, Duhaime said.
Any Bitcoin business would need a bank account to operate, but because of stringent or unclear regulatory guidance and the need for banks to remain compliant, these companies often have difficulty securing access to the banking system.
"The whole idea that we are going to wholesale deny banking services to a sector of the economy without undertaking risk assessments to identify and manage the risk is outrageous," said Duhaime, who is also executive director at the Digital Finance Institute. "That's not what the AML/CTF laws were designed for and moreover, doing that creates a financial inclusion problem for business and people."
Faisal Islam, the compliance director at the payments startup Bolt.com, said it's equally important that Bitcoin companies understand the banks' concerns, and that AML, while significant, is the least complicated part to explain.
There's a vast area of things that banks are also concerned about whether startups have strong cybersecurity procedures and policies, Bitcoin security practices, and customer disclosures.
"It's also important for Bitcoin companies to grasp why banks are hesitant to bank Bitcoin businesses," he said. "The AML part gets discussed very often, and as an AML officer I appreciate that, but that's not the only component."
A year ago today, the Canadian Parliament made up of the Senate and the House of Commons approved the first national digital currency law in the world, passing Bill C-31 to allow regulation over digital currency transactions as a matter of AML law.
Amber Scott, founder of the Canadian AML consulting firm Outlier Solutions, says she hasn't actually seen those enabling regulations happen yet and the Senate recommendations aren't out of line with that bill.
"The bill says dealers in digital currencies, as yet to be defined, should be regulated as money-services businesses," Scott said. "But what is the definition of dealing in digital currencies?"
The Department of Finance still hasn't settled on a definition for it.
"I was surprised and pleased to see that the government committee really saw the upside to the tech innovation," Scott said. "I wouldn't downplay the risk risk is important but it shouldn't be our only focus."