On March 5, the Alberta-based Bitcoin exchange Flexcoin
collapsed, following a cyber attack that stole $600,000 worth of
digital currency. This was the second major exchange collapse,
following in the heels of the theft of $450 million worth of
Bitcoins from the Japanese-based Mt. Gox last month. With the legal
status and the security of cryptocurrencies in doubt, investors in
Canada and around the world are facing legitimate concerns
regarding the safety of their investments.
Bitcoin and other cryptocurrencies operate largely like a
commodity. Bitcoins are ‘mined’ by using computer
processing power to solve digital problems. Once sufficient
computing power has been used to chew through a problem, a block of
Bitcoins may be released. Then the problem restarts at a higher
level of difficulty, meaning that more processing power must be
used to retrieve coins. This mining favours early adopters, and as
the value of Bitcoins has risen from a few dozen dollars to a peak
of $1000/coin last fall, several early users have made princely
Cryptocurrencies have been used to ‘pay’ for items,
several online stores and charities accept Bitcoin. A related
cryptocurrency, Dogecoin (based off an internet meme of a shiba inu
dog), partially funded the Jamaican bobsled team’s
participation in the Olympics in Sochi. Cryptocurrencies, due to
their anonymous and unregulated nature, have also been used for
illegal online transactions and money laundering. However,
cryptocurrency exchanges have become the nexus of legitimate
profit. The coins are traded like a commodity or real currency.
The legal status of Bitcoins is still quite vague and there is a
patchwork of rules that vary by country. Last year, the Canada
Revenue Agency officially declared cryptocurrencies a commodity for
tax purposes and that profits will be treated as capital gains. At
the same time, a Texas court ruled that Bitcoins were currency.
Justice Mazzant, in the case of SEC v. Shavers, 2013 BL 208180 (E.D.
Tex. Aug. 6, 2013), ruled that:
“It is clear that Bitcoin can be used as money. It can be
used to purchase goods or services, and as Shavers stated, used to
pay for individual living expenses. The only limitation of Bitcoin
is that it is limited to those places that accept it as currency.
However, it can also be exchanged for conventional currencies, such
as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a
currency or form of money, and investors wishing to invest in BTCST
provided an investment of money.”
The Japanese cabinet is currently deciding how Bitcoins will be
treated and taxed, while China has banned financial institutions
from trading in cryptocurrencies.
The main danger of cryptocurrencies is that due to their
inherent value as an anonymous, unregulated commodity, a precise
cyber attack can cause the loss of millions of dollars, but leaves
victims with little recourse. A wildly fluctuating value and
unclear legal status only compound the problem, making Bitcoin a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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