The world’s most cautious profession and the world’s most unpredictable digital currency make strange bedfellows, but the meteoric rise of bitcoin has lawyers across a wide variety of practice areas excited.
As usage of bitcoin, a peer-to-peer currency that bypasses a central banking authority, goes mainstream, lawyers and regulators around the world in the tax and securities fields have plenty to think about. In addition, a string of controversies and high-profile thefts from bitcoin exchanges have turned off some investors and piqued the interest of class actions lawyers.
The volatility of the currency is evident from the experience of anti-money laundering lawyer Christine Duhaime. Two years ago, she had never heard of bitcoin but now she’s literally writing the book on it as she’s the lead author of Bitcoin and Digital Currency Law. Yet even she can’t say for sure whether the eponymous currency will still be around by the time the book comes out later this year.
Bitcoin, the most popular of a multitude of digital currencies, exists as strings of code stored on a network of computers around the world. Anyone can join the network on which every transaction is encrypted and logged. For most of 2010, you could pick up one unit of bitcoin for less than 10 cents. The value peaked in late 2013 at $1,200 but has now levelled out at around $600.
“I think the whole protocol where you have a peer-to-peer, direct currency will still be around. That whole concept is amazing and will stay for a long time. It might be called something else or exist in a totally different form but it is here to stay,” says Duhaime, a partner at Vancouver- and Toronto-based Duhaime Law.
Duhaime says she’s excited by the possibilities presented by widespread bitcoin use, noting that the complicated logging system makes fraudulent transactions virtually impossible to complete. In addition, she says it could open up the world of financial services to entirely new populations.
“I’m thinking about the large population in Africa without a bank account and refugee camps where you might have cellphones but no banking services. Bitcoin has the potential to deliver financial services to them,” she says.
However, the currency’s reputation took a big hit at the beginning of 2014 when Mt. Gox, a popular bitcoin exchange, fell victim to a hack attack that allowed thieves to make off with an estimated US$500 million of users’ stored bitcoin. In March, Alberta-based exchange Flexcoin suffered a similar attack that resulted in user losses of about $600,000.
The Mt. Gox case has spurred a host of legal consequences with the exchange likely heading for liquidation after the failure of bankruptcy proceedings. Meanwhile, Toronto firm Charney Lawyers has teamed up with a U.S. counterpart to launch a class action lawsuit against the company.
“Where is the money?” demanded Principal Ted Charney in a statement announcing the launch of the class action that names Mt. Gox and its Japanese bank as defendants and seeks $500 million in compensation.
Duhaime notes the need for improved consumer protection around bitcoin but worries all of the negative publicity could lead to a regulatory crackdown that could stifle the currency’s development.
“The challenge for policymakers is how to make bitcoin use safer and secure without killing the innovative side of it,” she says.
According to Duhaime, Canada has a chance to set the tone for bitcoin regulation around the world when it publishes rules on the application of terror-financing and money-laundering laws to digital currencies.
Stuart Hoegner, a gaming lawyer who acts as counsel to the Bitcoin Alliance of Canada, says he welcomes the move that could force bitcoin exchanges to investigate and report suspicious transactions.
“I’ve always told clients that because of the Criminal Code, you don’t want to unwittingly be dealing with the proceeds of crime. My sense is with good exchanges, it’s not going to change a lot,” he says.
“It might add a layer of compliance costs to the business but it’s going to be good in terms of giving the currency more credibility in Canada. I applaud any regulator or government that acknowledges bitcoin is a way of doing business and not just a way of transacting in money.”
Hoegner backs up his faith in bitcoin in his personal and professional life. He began trading in the currency in 2011, long before its spike in popularity and value. Unfortunately for him, though, he has spent almost as much as he has collected.
“I always wish I’d bought more and held for longer. But I can’t really complain. I feel like I’ve done well,” he says.
More than a year ago, he began to accept bitcoin as payment for legal services, making him one of the first Canadian lawyers to do so. After checking in with the Law Society of Upper Canada, they were “completely comfortable” with it, he says.
The Canada Revenue Agency also indicated its comfort with bitcoin with a series of bulletins over the last few months, although it didn’t go as far as classifying it as a currency. Instead, it regards the use of bitcoins to buy goods or services as a barter transaction. That follows the lead of most other jurisdictions around the world, including the United States, according to Tim Fitzsimmons, a tax partner in the Toronto office of Dentons Canada LLP.
“They are basically saying that if a business is accepting bitcoin in exchange for goods, they have to report the value of it in Canadian dollars and that will go down as business income. GST would also be applicable on that value,” he says.