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.

This blog post gives a high-level overview of the Canadian regulatory landscape for Bitcoin. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you obtain legal advice before acting in this space. 

Photo from http://www.flickr.com/photos/54327644@N04/12478008873/

Dispelling the Unregulated Myth

A common myth about Bitcoin is that isn’t regulated. Although the protocol technology isn’t regulated, Bitcoin businesses operating in Canada should be aware of the laws that govern their activities.

Update: Bill C-31 has passed and will affect many Bitcoin businesses.

Federal Regulation

There are three key laws at the federal level: the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the Income Tax Act, and the Excise Tax Act.

Proceeds of Crime (Money Laundering) and Terrorist Financing Act

The principle source of money transfer rules in Canada is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (often shortened to PCMLTFA). The client identification procedures that some Bitcoin businesses have adopted usually stem from this law.

The PCMLTFA requires different actions to be taken by different classes of business. The category of most interest to Bitcoin businesses is the “money services business” (MSB). 

The PCMLTFA creates a regulatory agency called FINTRAC (in the United States there is a similar regulator: FINCEN). It also sets out severe penalties for money-laundering offences (there are other offences in the Criminal Code of Canada).

Income Tax Act

This is the main law that governs how much tax an individual or business must pay. Of most interest to Bitcoin businesses are the provisions concerning barter transactions (selling bitcoins for $), inventory (holding bitcoins to be sold) and capital gains (changes in the value of bitcoins held as an investment).

Excise Tax Act

The Excise Tax Act sets out how much HST/GST (Canadian VAT) is payable and under what circumstances. Most business are required to charge federal sales tax on sales but not all good/services are taxable.

Ontario Regulation

There are three Ontario laws that might be important for a Bitcoin business to be aware of: the Ontario Securities Act, the Consumer Protection Act, 2002 and the Sale of Goods Act. 

Ontario Securities Act

The Ontario Securities Act sets out the regulatory scheme for the buying and selling of securities (e.g. stocks, bonds, etc.). By default most transactions are banned, and businesses must find a relevant exemption that allows their activity.

This law is very similar to the United States Securities Act of 1933. In Canada the provinces (not the federal government) regulate thebuying and selling of securities.

Consumer Protection Act, 2002

The Consumer Protection Act, 2002 affects the sale of goods and services to consumers by providing them with extra rights, including the possibility of reversing unfair transactions.

Sale of Goods Act

The Sale of Goods Act sets out the rights and obligations of purchasers & sellers of goods in Ontario. 

Laws of Interest to International Businesses

For international businesses, the following may also be of interest: the International Sale of Goods Act, Ontario’s conflict of laws scheme (case law and the Rules of Civil Procedure) and arbitration rules (case law and Arbitration Act, 1991). Other provinces have different laws but they are generally quite similar.

Get A Lawyer

This post is based on the author’s experiences with Bitcoin businesses. Other legal rules may apply to your situation. Please consult a lawyer instead of relying on the legal information given in this post.