Author: Anthony Di Iorio

This blog post discusses the definition of “money laundering”. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal counsel to obtain advice about money laundering.

Photo from http://www.flickr.com/photos/59937401@N07/5857345827

“Money laundering is the process used to disguise the source of money or assets derived from criminal activity” according to FINTRAC, Canada’s money laundering regulator. 

Money laundering is how criminals earn money illegally and convert it, through a series of steps, into money indistinguishable from legitimately earned income. The “series of steps” that money launderers use are diverse and constantly changing as they attempt to outwit law enforcement/tax authorities. 

The OECD’s Financial Action Task Force explains the reason why criminals need to launder money:

“In order to be able to spend money openly, criminals will seek to ensure that there is no direct link between the proceeds of their crime and the actual illegal activities. They may also seek to construct a plausible explanation for an apparent legal origin of the money that they possess. In this way, criminals seek to “launder” their proceeds of crime before spending or investing it in the legal economy.”

The primary source of law in Canada regarding money laundering is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. There are also Criminal Code offences (to be covered in future posts).

FINTRAC (the anti-money-laundering regulator in Canada) maintains a public database of every registered money services business: 

http://www10.fintrac-canafe.gc.ca/msb-esm/public/msbregistry/searchByName/clf-eng.html

Here’s an example from the registry for Canada’s largest Bitcoin trading network: VirtEx.

This blog post looks at the issue of whether sellers of bitcoins need to charge HST. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. Tax is a complex area and you should seek accounting/legal advice before acting.

Most stores in Ontario that sell goods are required to charge 13% HST. According to the CRA:

“Almost everyone has to pay the GST/HST on purchases of taxable supplies of property and services (other than zero-rated supplies). A limited number of sales or supplies are exempt from GST/HST.”

One transaction that is exempt from HST is the sale of “gift certificates”, as provided for in s. 181.2 of the Excise Tax Act:

“… the issuance or sale of a gift certificate for consideration shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money.”

The Excise Tax Act does not define “gift certificate” but in 2012 the CRA issued a policy statement that explains their view on what a gift certificate is. The CRA’s definition of gift certificate requires the following five attributes:

“1. It has a monetary exchange value that is evident on the certificate or that is easily determined by the parties involved in the transaction. The monetary exchange value may, for example, be specified on the face of the certificate or it may be stored on the certificate electronically. In certain cases, the customer may be permitted to add additional amounts to the monetary exchange value of the certificate. Alternatively, the gift certificate may be for a particular supply of property or a service that is identified on the certificate.

2. It is issued or sold for consideration by the supplier of the property or service or another party for use at a particular supplier. The consideration paid for the certificate may not necessarily be the same as the monetary exchange value.

3. It is accepted as payment or partial payment of the consideration for a supply of property or a service offered by the supplier of that property or service.

4. It does not require the bearer to do anything to redeem the certificate other than to present it as a means of payment or partial payment for the property or services being acquired. The holder of the certificate should not be required to meet other conditions, such as, making a purchase of a particular value (i.e., a required minimum value) or purchasing one item to exchange the gift certificate for another item (e.g., buy one, get one free) in order to redeem the certificate.

5. It does not have any intrinsic value. The certificate should not have any value other than its monetary exchange value.”

In addition to the CRA’s policy statement there is case law that helps to explain what “gift certificate” means in Canadian law such as Royal Bank of Canada v. The Queen, 2007 TCC 281.

There are severe penalties for failing to comply with tax obligations. A seller of goods who fails to charge HST could be liable for the entire amount that should have been charged (with interest and penalties) and, if the seller is a corporation, liability may extend to the director(s). 

It is possible to request from the CRA a tax ruling or interpretation regarding HST obligations: http://www.cra-arc.gc.ca/E/pub/gp/rc4405/rc4405-e.html, but this please note that interacting with the CRA may result in negative tax consequences. You are strongly advised to seek the advice of a tax professional before starting to sell bitcoins or charging/not charging HST.

This blog post discusses the question of whether bitcoins are “securities” in Ontario. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal advice on issues related to securities law.

Photo from http://www.flickr.com/photos/foto_orange/11921659744/

If bitcoins are “securities” under Ontario securities law then there are important implications for anyone engaged in trading them. 

According to the Ontario Securities Commission (the regulator of securities):

“In general, firms must register with the OSC if they conduct any of the following activities in Ontario:

-are in the business of trading in, or advising on, securities. This is referred to as the “business trigger” for registration.

-act as an underwriter or as an investment fund manager

-conduct trading activities involving commodity futures contracts or commodity futures options.

Individuals must register if they:

-trade, advise or underwrite on behalf of a registered dealer or adviser, or

-act as the ultimate designated person or chief compliance officer of a registered firm.

The main restriction on securities activities can be found in section 25(1) of the Ontario Securities Act:

"Unless a person or company is exempt under Ontario securities law from the requirement to comply with this subsection, the person or company shall not engage in or hold himself, herself or itself out as engaging in the business of trading in securities unless the person or company, a) is registered in accordance with Ontario securities law as a dealer or b) is a representative registered in accordance with Ontario securities law as a dealing representative of a registered dealer and is acting on behalf of the registered dealer”

Securities Act, R.S.O. 1990, c. S.5, s. 25(1).

But what is a “security”? “Security” is a very broadly defined term that includes the following 19 sub-definitions:

“(a) any document, instrument or writing commonly known as a security,
(b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company,
© any document constituting evidence of an interest in an association of legatees or heirs,
(d) any document constituting evidence of an option, subscription or other interest in or to a security,
(e) a bond, debenture, note or other evidence of indebtedness or a share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription other than,
(i) a contract of insurance issued by an insurance company licensed under the Insurance Act, and
(ii) evidence of a deposit issued by a bank listed in Schedule I, II or III to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies, by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act or by an association to which the Cooperative Credit Associations Act (Canada) applies,
(f) any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser for a benefit payable at maturity,
(g) any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the option of the recipient or of any person or company,
(h) any certificate of share or interest in a trust, estate or association,
(i) any profit-sharing agreement or certificate,
(j) any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate,
(k) any oil or natural gas royalties or leases or fractional or other interest therein,
(l) any collateral trust certificate,
(m) any income or annuity contract not issued by an insurance company,
(n) any investment contract,
(o) any document constituting evidence of an interest in a scholarship or educational plan or trust, and
(p) any commodity futures contract or any commodity futures option that is not traded on a commodity futures exchange registered with or recognized by the Commission under the Commodity Futures Act or the form of which is not accepted by the Director under that Act,
whether any of the foregoing relate to an issuer or proposed issuer”

Securities Act, R.S.O. 1990, c. S.5, s. 1(1).

Some of the sub-definitions clearly can’t apply to bitcoins (e.g. “any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate”). Others, such as “investment contract” require the assistance of case law to interpret. 

There’s very little information available about the position of the Ontario Securities Commission. An Ottawa Citizen article published on February 25th, 2014 notes that “[t]he Ontario Securities Commission has said it is closely monitoring developments pertaining to digital currencies”. 

A securities lawyer can help you understand whether Ontario’s securities regulation regime is applicable to your Bitcoin business.

This blog post discusses the applicability of the Ontario Consumer Protection Act, 2002 gift card rules to the purchase of bitcoins. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal advice when deciding whether the Consumer Protection Act, 2002 applies to your transactions.

Photo from http://www.flickr.com/photos/68751915@N05/6710889059/

The Consumer Protection Act, 2002 (CPA)is the main consumer protection law in Ontario. Among its many provisions are rules about “gift cards”, a concept that sounds like it could include bitcoins. If the sale of bitcoins is considered the sale of gift cards under the CPA then there could be fee limits for sales (ss. 25.4(2)(a) & 25.4(2.1)(b)) and potentially a consumer refund right (s. 25.4(3)-(4)).

Gift card is a defined term in the CPA:

“gift card” means a voucher in any form, including an electronic credit or written certificate, that is issued by a supplier under a gift card agreement and that the holder is entitled to apply towards purchasing goods or services covered by the voucher; …

“gift card agreement” means a future performance agreement under which the supplier issues a gift card to the consumer and in respect of which the consumer makes payment in full when entering into the agreement; …

“open loop gift card agreement” means a gift card agreement that entitles the holder of a gift card to apply it towards purchasing goods or services from multiple unaffiliated sellers. 

Consumer Protection Act, 2002, OR 17/05, s. 23.

The definition of gift card requires that the “holder is entitled to apply [it] towards purchasing goods or services covered by the voucher”. When a consumer purchases bitcoins they are not entitled as the holder of those bitcoins to apply them towards good or services. There are some merchants who accept bitcoins but this isn’t any different than merchants willing to barter for other goods. Since there’s no entitlement it seems unlikely that a bitcoin purchase could be considered a gift card purchase under the CPA.

Photo from http://www.flickr.com/photos/51486173@N00/223052548/

The IRS (US tax authority) recently released a six page document with 16 questions and answers that explain position on Bitcoin: http://www.irs.gov/pub/irs-drop/n-14-21.pdf.

Our own CRA hasn’t put quite so much pen to paper but did post a fact sheet on digital currency late last year: http://www.cra-arc.gc.ca/nwsrm/fctshts/2013/m11/fs131105-eng.html.

This blog post is an overview of the steps required to set up a Bitcoin business. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you obtain your own legal advice before starting a Bitcoin-related company.

Every business is different but the following steps are an overview of the general process that many businesses take in order to get started.

Step 1: Identify Legal Issues with Your Proposed Business

There may be laws that restrict your ability to do business or might direct you to carry out your business in a certain way. The Bitcoin space is filled with misunderstandings about the law and some businesses may be subject to complex regulatory schemes (e.g. anti-money-laundering rules).

Step 2: Sole Proprietorship vs. Partnership vs. Corporation

The first step is to consider the business organization that you’d like to set up. This can be deceptively complex and hiring a lawyer may be quite helpful.

The provincial organization that regulates lawyers (Law Society of Upper Canada) provides this document with issues for lawyers to consider: http://www.lsuc.on.ca/For-Lawyers/Manage-Your-Practice/Practice-Area/Business-Law/How-to-Choose-the-Right-Business-Vehicle/. 

The simplest form is the sole proprietorship where you do business in your own name. A partnership is a business that’s similar to a sole proprietorship but with several individuals who jointly own the business. A corporation is a business that has an existence separate from that of the people running it.

Most startups choose to create a corporation for a variety of reasons (many entrepreneurs cite “limited liability” as their motivation). Often if incorporation isn’t chosen it’s because the sole proprietorship/partnership results in a more favourable tax scenario. An accountant or lawyer can help you understand the best structure for your circumstances.

Step 3: Federal vs. Provincial Incorporation

Corporations may be created at either the federal or provincial level. While there is often no practical difference between federal and provincial corporation there may be reasons to select one or the other for your circumstances. A federal incorporation is $50 cheaper. 

Step 4: Business Name

Do you want to create a named company or a numbered company? A named company would be something like “ABC Inc.” A numbered company is one that looks like “12345678 Canada Limited”. Numbered corporations are issued faster and may better reflect how you wish to interact with business partners, government, banks, etc.

If you opt for a numbered corporation then you will have to register any other names that you’d like to do business under (e.g. “12345678 Canada Limited” doing business as “Ottawa Bitcoin Consultants”). Business name registration in Ontario can be done online using the Integrated Business Services Application.

Step 5: Registration Steps

If you are registering a federal corporation then you should consult the Guide to Federal Incorporation before beginning the registration process.

Online incorporations are done through Industry Canada’s Online Filing Centre: https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/bs/crp-wz.html.

Step 6: Meeting of Initial Directors and Shareholder Meetings

Once a company is created the initial directors will have a meeting to decide on how the company should be run. The long-term directors will be appointed and shares granted.

Following the initial directors meeting there will be a meeting of the shareholders.

Step 7: Banking, Accounting, Legal, Compliance, etc.

Depending on your business there may be a host of issues that you should consider once you have created your company including: setting up a bank account, registering for HST, considering how people who work for you will be paid, WSIB registration, corporate tax returns, corporate record keeping, bookkeeping, anti-money-laundering compliance, leasing space, drafting contracts with customers, domain registration, etc.

Step 8: Join Canada’s Largest Bitcoin Business Community

Bitcoin Decentral at 64 Spadina Ave. operates a co-working space and rents private offices. 

This blog post was written by Addison Cameron-Huff, a lawyer who works for Bitcoin Decentral. The definitions below have been simplified to make Bitcoin approachable. To learn more about what these words mean you should attend the Bitcoin Decentral Toronto Meetup at 64 Spadina Ave., Toronto every Wednesday night at 7pm.

Photo from https://www.flickr.com/photos/andrewrennie/5239376110

Address = A public identifier to which bitcoins can be sent, similar to an email address. An address always has a corresponding “private key” that can be used to transfer the bitcoins that reside at that address. An address looks like this: 1M72Sfpbz1BPpXFHz9m3CdqATR44Jvaydd.

Bitcoin = The protocol that computers use in order to send or receive bitcoins (capital B = the protocol, lowercase b = the currency). Think of the Bitcoin protocol like the system by which banks process cheques – the cheque system (Bitcoin protocol) is how money (bitcoins) is moved between accounts. “BTC” is the abbreviation in the same way that “USD” is the abbreviation for US dollars.

Block = A snapshot of the transactions that occurred over a period of time, usually several minutes.

Block Chain = The decentralized database of every Bitcoin transaction that’s ever happened. Other cryptocurrencies have their own block chains.

BTM = A Bitcoin ATM machine, like this one at Decentral Cowork in Toronto.

Cryptocurrency = A system for transferring units of wealth between users that makes heavy use of cryptography principles. 

Exchange = A business that allows its customers to buy and sell bitcoins with each other (note that an exchange doesn’t sell its own bitcoins). Think of exchanges like stock exchanges. Examples of Canadian exchanges are Vault of Satoshi and VirtEx.

Mining = The process by which new bitcoins (or other cryptocurrencies) are created. Bitcoin Mining creates new “blocks” in the “block chain”.

Private Key = The password that allows someone to transfer bitcoins. 

QR Code = Bitcoin “addresses” are often displayed as black and white checkerboard patterns that can be easily scanned using phone cameras. An example QR code can be seen in the top right of this page: http://seansoutpost.com/donate/.

Wallet = A computer program for holding passwords (“private keys”) and “addresses”. Blockchain.info (online and mobile), Electrum (desktop program), KryptoKit (Chrome extension) and Armory (desktop program) are popular wallets.

Advanced Definitions

Altcoin = Alternative Coin = A digital currency based on (usually competing with) Bitcoin.

ASIC = Application Specific Integrated Circuit = Specialized hardware that has been designed to mine Bitcoins.

Dealer = Someone who buys or sells bitcoins. A good online example of this is QuickBT. Localbitcoins.com (a bit like Craigslist) is the most popular website for dealers to connect.

Digital Currency = See “Virtual Currency” below.

Dogecoin = An altcoin created as a joke but that has gone on to become popular enough to be used to sponsor an Olympic team and a NASCAR car.

Hash = A type of mathematical function that is a building block of the cryptography that Bitcoin uses. All of the computers that together form the Bitcoin network collectively do approximately 75,000,000,000,000,000 hashes per second.

Litecoin = The second most popular altcoin. The key innovation is that “mining" Litecoin requires processing power + memory (instead of just processing power).

Mixing Service = A software service that mixes transactions together in order to create a confusing or impossible to follow trail. An example of a mixing service is coinjoin.

Paper Wallet = A piece of paper with a private key and address. 

Signing = The process by which a private key is used to create a Bitcoin transaction. For more information on how Bitcoin transactions work: http://www.coindesk.com/information/how-do-bitcoin-transactions-work/.

Virtual Currency = A synonym for "digital currency”, a non-traditional online currency. Bitcoin and Linden Dollars are virtual currencies.