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Industry fears Ottawa's 'overreach' could limit crypto access after Budget 2024

HONG KONG, HONG KONG - JUNE 15: As a visual representation of the digital Cryptocurrency, Ethereum (ETH) and Bitcoin (BTC), on June 15, 2018 in Hong Kong, Hong Kong. (Photo by S3studio/Getty Images)
Some industry leaders worry the government will revoke the tax-sheltered status of crypto-backed ETFs. (Photo by S3studio/Getty Images) (S3studio via Getty Images)

The 2024 federal budget could make investing in cryptocurrencies more difficult for Canadians and add more barriers to growth and innovation, industry leaders say.

A consultation plan buried within a budget annex document has some worried the government will remove the tax-sheltered status of crypto-backed ETFs. And the leaders fear that the Canadian government’s enduring doubts concerning cryptocurrencies will dominate the implementation of new OECD reporting requirements for transactions.

“One of the issues that I think our industry has with the budget is a prevailing negative narrative calling cryptocurrency a risk to the financial security of the middle class,” said Morva Rohani, executive director of the Canadian Web3 Council, a group representing many fintech, crypto and blockchain companies. “I think it's a bit of an overreach but at the same time, I think that the government is trying to find different ways to limit people's access to this ecosystem and limit incentives for people to invest in this ecosystem.”

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In an interview with Yahoo Finance Canada, Adam O’Brien, CEO of the bitcoin platform Bitcoin Well, was more blunt. “The government is not interested in making this work for consumers and business,” he said. “If it's not a friendly business environment, the businesses will not stay and it is getting easier and easier to pick up a bitcoin crypto-focused business and put it into a different jurisdiction.”

In a statement emailed Friday evening, Department of Finance spokesperson Catherine Thériault wrote: "A safe and secure financial system is a cornerstone of our economy. The government also continues to work closely with federal and provincial regulators to assess risks to consumers, national security, fair competition and the stability and integrity of the financial system."

The budget annex document says the government will seek submissions on a number of issues related to registered plans, including “whether crypto-backed assets are appropriate as qualified investments” for those plans. A decision to exclude crypto-backed funds from qualified investment status would reduce Canada’s competitiveness in the crypto ecosystem, Rohani argued. “With crypto ETFs being approved in the U.S., we're already seeing a lot of dollars flow out of Canadian ETFs and into the U.S.”

Disqualifying crypto ETFs from registered plans would also amount to “getting rid of a potentially safer and easier way for people to invest in crypto and their ability to diversify their Investments,” and drive some money to jurisdictions with scant regulations.

Crypto-backed ETFs make up a small percentage of Canadian funds, but those funds, backed by bitcoin, ethereum or a combination of the two, have billions of assets under management. The largest, Purpose Investments’ Purpose Bitcoin ETF (in multiple series), had over $2 billion in assets as of Thursday.

The federal budget formalizes the Canada Revenue Agency's oversight of the implementation of crypto reporting standards agreed to by OECD nations in 2022 called the Crypto-Asset Reporting Framework (CARF). Canada is one of 48 signatories who have committed to implementing CARF by 2027.

The intent of CARF is “to try to internationally avoid tax evasion and other illicit activities via usage of crypto currencies and assets,” Katrin Tinn, an assistant professor of finance at McGill University, told Yahoo Finance Canada.

CARF defines what kind of crypto assets and transactions should be tracked, the range of data that needs to be collected, and how to determine tax jurisdiction when a transaction happens.

But CW3’s Rohani says there is concern about clarity in the domestic implementation.

“It is our impression that this ecosystem or crypto assets in general are not a priority for this government,” she said. “At least when it comes to engagement with the industry on the regulatory framework. They launched a digitalization of money consultation about two years ago, and that's actually gone nowhere.”

The government hasn’t communicated timelines or objectives since that consultation, Rohani says, and its “lack of engagement … is what's hindering innovation in the space right now.”

O’Brien, the Bitcoin Well CEO, says he has received contradictory letters from Canadian regulators for years. He says he expects Canada’s implementation of CARF to intrude upon the privacy of a vast majority of law-abiding individuals in order to stop tax evasion by a tiny subset and to impose obligations on Canadian businesses based upon "antiquated" currency systems.

“If Canada wants this business … they're going to have to stop applying principles that have not worked for tens and tens of years to this brand new money system,” he said. “I feel like we’re working with a government that is trying to force a YouTube video right into a VHS player.”

John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.