The Risk and Rewards of Blockchain Technology and Cryptocurrencies

This article was originally published on the Business in Vancouver site. It has been reproduced with permission.

The Risk and Rewards of Blockchain Technology and Cryptocurrencies

A lot has been written about blockchain technology and cryptocurrencies (also referred to as tokens). Blockchain technology, which is the technology underlying cryptocurrencies, is designed to eliminate the trust that is needed of central authorities/institutions in transaction and record authentication, and has a diverse set of potential applications such as inexpensive and instant international remittances, privacy protection for digital payments, record keeping, counterfeit protection, or broadly any type of process that requires an intermediary to validate something. The use of blockchain technology may automate away the need for many support services resulting in both time and cost efficiencies. Blockchain technology additionally includes smart contract functionality, which allows multi-party business contracts to be executed automatically within a Blockchain network. Blockchain technology is also generally transparent, verifiable and permanent, which may reduce risks associated with fraudulent activities.

There is a dark side to cryptocurrencies. Generally, cryptocurrencies allow for a level of anonymity and thus attracts illicit activities. Cryptocurrencies transactions are public; however, the parties to the transaction can remain anonymous, as only a public key portion of a complete transaction participant’s address is attached to a transaction, not the private key or any identifying personal information. As such, it is no secret that cryptocurrencies have been used for illicit purposes such as money laundering and drug trafficking. In the case of ransomware, cyber criminals have frequently demanded cryptocurrency as payment to recover encrypted data.

Illicit activities aside, people are purchasing and trading cryptocurrencies through cryptocurrency exchanges. Cryptocurrency exchanges serve as the on and off-ramps from government issued fiat currencies to cryptocurrencies and facilitate the trading of one token for another. At the time of this article, Canadian cryptocurrency exchanges operate outside of any regulated anti-money laundering or anti-terrorist financing structure. Regulations are expected to come into force in 2019-2020 and proposed regulations have recently been published.

Lately, we are seeing increased challenges with transferring government issued currency from a cryptocurrency exchange back to one’s bank account. The banking industry is under pressure when it comes to compliance with money laundering and financial crime regulations. Given the perceived association of cryptocurrencies with dark net and illicit activities, banks are understandably reluctant to provide services to individuals or entities who are transferring large dollar amounts from cryptocurrency exchanges. We are aware that some Canadian banks are freezing accounts for individuals and entities partaking in such transactions.

However, not all banks in Canada have taken a hard stance against cryptocurrencies. Each bank determines its own stance and approach; some are still open to transactions associated with cryptocurrency. MNP has been involved in the review of cryptocurrency trading data and other financial records, specifically to identify the means by which the individual or entity acquired and subsequently sold cryptocurrencies. This was performed at the request of the bank. We anticipate an increase in requests for these reviews if cryptocurrencies gain more adoption.

For most small and medium businesses, the question is not about whether to speculate in cryptocurrencies; rather, how and when to accept cryptocurrency as payment to take advantage of the possible benefits this medium of exchange can offer. The risks with doing so are not easily overcome.

The ability for tokens to be tainted (generally tokens associated with an illicit activity) coupled with their history of volatility are enough to scare off most businesses. For example, if a business were to accept tainted cryptocurrency, the business is at risk of having those tokens seized by an exchange when trying to sell for government issued currency.

Cryptocurrencies aside, Blockchain technology is widely seen to be revolutionary technology, with many industry-disrupting applications and will emerge embedded in many technology platforms in the next few years. If cryptocurrencies become more widely adopted and the associated risks are reduced through further technological advancement and regulation, cryptocurrencies may provide for more efficient, transparent, and cost-effective means of doing business globally.

Based out of Vancouver, Mark Jordan CPA, CA, CFE, CFF, is a Senior Manager with MNP’s Investigative and Forensic Services team. He can be reached at 778.374.2107 or email [email protected].

Based out of Vancouver, Blake Allan, CPA, CA, is a Senior Manager with MNP’s International Tax Services team. He can be reached at 778.372.5323 or [email protected].