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A Bitcoin sign is seen in a window in Toronto


When the Bank of Canada mused last fall about whether it would someday issue its own digital currency, it revived a long-standing debate: How do you regulate a currency that is entirely electronic?

Faced with the conundrum of balancing changing technology with a central bank's ability to influence macroeconomic activity, Canada is just one of many countries eyeing increased regulation around virtual money such as bitcoin.

In the process, Canada approved what has been described as the world's first national law on digital currencies last year as part of its national anti-money laundering law. It requires cryptocurrency exchanges to register and to report suspicious transactions that may be linked to money laundering and terrorist financing.

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The government is also looking at more broad regulation of the industry. Canada's Standing Senate Committee on Banking, Trade and Commerce has spent the past year or so studying the use of digital currency, and is expected to report by the end of June on the potential risks, threats and also advantages.

Jason Thomas, manager of innovation for the government segment of Thomson Reuters, said Canada is forging an exciting path when it comes to regulating the industry.

He said the Bank of Canada's talk about potentially issuing its own digital currency like bitcoin, someday, is "brilliant."

"For a government to come out and say they are thinking about issuing their own digital currency means they are exploring new and innovative ways to enable commerce," Thomas said.

Supporters of bitcoin hope one day that individuals all over the world will be able to independently exchange goods or services through self-negotiated and self-enforced contracts.

But experts say the lack of a regulatory framework is in part causing uncertainty for businesses that are getting on board the cryptocurrency bandwagon.

"An appropriate level of regulation can actually be very beneficial to this industry," said Samir Saadi, an assistant professor at the University of Ottawa's Telfer School of Management, who was also one of the experts to testify before the senate committee.

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"Regulation should be proportionate to the risk associated with cryptocurrency. Regulation should not increase the cost of compliance for this growing industry, which could undermine its growth, or worst make it go underground."

Cryptocurrency, such as bitcoin, is designed specifically to compete with national currencies. They are problematic for central banks because they exist outside of a central authority. In addition, use of these currencies continues to grow despite well-publicized cases of people losing their virtual money.

Bitcoin also has an unfair reputation as a free-for-all currency platform, according to Francis Pouliot, director of public affairs at the Bitcoin Embassy in Montreal.

"Bitcoin doesn't exist in a legal vacuum. Just because you use bitcoin doesn't mean you are exempt from the law," he said.

More surprising is the idea that the bitcoin industry wants regulation, as long as it's treated equally to other currency operations.

"We want to be regulated just as the businesses that use Canadian dollars, but we don't want any additional regulations, which would in effect be discriminatory," he said.  "We want a technology-neutral regulatory framework."

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Pouliot said most bitcoin operations want to be compliant, which will help them to open bank accounts and prove they are operating as legitimate businesses.

The federal government has included digital currency to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which regulates money-transfer entities such as banks, security dealers and casinos. Quebec's financial services regulator, the Autorité des marchés financiers, amended its Money Services Businesses Act earlier this year, requiring businesses operating a virtual currency automated teller machine or virtual trading platform to obtain a licence. It's the only province so far with this type of legislation.

John Jason, lawyer and a leader of the financial services regulation team at Norton Rose Fulbright in Toronto, said any proposed regulation needs to take into consideration investment and security risk, while at the same time allowing digital currency  to develop roots in Canada.

"The problem is balancing those two imperatives: You want to protect Canadians and our economy and way of life. At the same time, we don't want to inhibit innovation," he said.

Jason believes it could be too soon for Canada to develop a big legal infrastructure about cryptocurrency, given that the technology is still evolving.

"We don't know what's going to happen," he said.

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It's also clear that The Bank of Canada still has reservations about virtual currencies in general.

In a speech last fall, Bank of Canada senior deputy governor Carolyn Wilkins couched the idea of a virtual currency with the qualifier that a widespread cryptocurrency would be a "very unlikely situation."

"Let me be clear, we are nowhere near this point today," Wilkins said. "But if we were, it would be even more important to determine whether issuing e-money is a role that should be done by the central bank."

For more information on cryptocurrency and other emerging technology, visit Jason Thomas' website. You can also keep updated on movements in financial and risk on the Thomson Reuters blog.

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This content was produced by The Globe and Mail's advertising department, in consultation with Thomson Reuters.  The Globe's editorial department was not involved in its creation.

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