(Kitco News) – The fact that Bitcoin was able to survive the bankruptcy of MtGox, the world’s biggest Bitcoin exchange, demonstrates the virtual currency is resilient; however, more needs to be done if the sector is going to become a mainstream financial product, said a Montreal economic think-tank.
On Thursday, the Montreal Economic Institute published a report on the future of Bitcoin, asking the question of how the Bitcoin sector should be regulated. David Descôteaux, associate researcher at the MEI and author of the report, said in an interview with Kitco News that the cryptocurrency sector will need government approval and industry regulations if it wants be accepted as part of the normal economic and financial landscape.
“Bitcoin can function right now, as is, without any regulations. But does it want to be mainstream? If that is the case, then there will be a need for regulations,” he said. “Consumers, by nature, need to be reassured and that is where regulations will play a role.”
David Descôteaux, associate researcher at the Montreal Economic Institute
The need for regulations was highlighted after MtGox rocked the marketplace with its announcement that millions of dollars worth of Bitcoins were stolen, which resulted in the company’s bankruptcy.
Despite the initial uncertainty in the marketplace, Bitcoin prices have remained relatively high. According to the aggregated price chart on Kitco.com, the cryptocurrency’ s low for the year was April 10 at $384.75. As of Friday at 1:54 p.m. EDT, the price was at $605.76 per coin.
However, it is important to look at the next step in this ever-evolving industry. Descôteaux explained it might only be a matter of time before regulations come into the marketplace as Bitcoin has already been attracting the attention of governments around the world.
Descôteaux said that the marketplace is becoming too big for governments to ignore. In 2013, global private investments in Bitcoin-related companies reached about $100 million. According to preliminary estimates for 2014, he said investments could reach $300 million, a three-fold increase.
The challenge for the Bitcoin sector, he added, is that governments will have to find a balance between regulations and free markets.
In the report, Descôteaux highlighted three countries that appear to be taking the lead in development of market friendly regulations — Canada, Germany and the U.S. Descôteaux admitted that the U.S. regulations could be problematic as there are still aren’t any clear definitions in place.
In early May, the U.S. Internal Revenue Service ruled that Bitcoin was not a currency but did give it tax status. Descôteaux said the concern with the ruling is that consumers will have to figure out the capital gains or losses for each Bitcoin before making a purchase.
“They would have to try to remember when they bought the Bitcoin and record the capital gains when they eventually redeemed,” he said. “What if they were only buying a cup of coffee?”
Canada Could Be The Next Bitcoin Hub
While the U.S. still has some wrinkles to work out, Descôteaux said that Canada and Germany appear to be on the right track. Germany has definitely taken the lead in embracing the Bitcoin and incorporating it into its financial sector. In December 2013, Germany was the first to recognize the cryptocurrency as a financial instrument.
Although Germany appears to be leading the way in regulating Bitcoin, Canada is quickly catching up and is becoming know as a Bitcoin friendly marketplace, said Descôteaux.
In his report, Descôteaux wrote that Canada was the second highest in venture capital investments, with $10.5 million invested, in the Bitcoin industry. The United States is clearly in first place with private investments worth $68.1 million.
“I think the people of Canada are open-minded and conscious of Bitcoin’s potential,” he said. “I am confident that the government will come up with rules but not excessive rules.”
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Although the Canadian government has not recognized Bitcoin as a currency, it has recognized it as a type of commodity, used under the barter system to trade for goods. Under Revenue Canada’s official stance, Bitcoin investors have to declare any capital gains and losses on their investments but business just have to declare the earnings as a result of accepting the virtual currency.
At the same time during the spring, the Canadian Senate banking committee held several meetings to discuss the potential of incorporating virtual currencies into the Canadian system.
However, Descôteaux said that Canada could easily become the new hub for Bitcoin companies and industry leaders aren’t afraid of regulations.
“Exchanges and companies in Canada want to be regulated because some of them can’t even have a bank account, which can become pretty complicated when you want to run and grow a business,” he said.
While researching the Bitcoin industry, Descôteaux said that he noticed there is a desire to create sector partnerships between Canadian banks and Bitcoin companies.
“The grey area in Canada is banking,” he said. “Since Bitcoin companies and exchanges aren’t regulated, banks are staying on the sidelines because they are prudent and don’t want to get into trouble with anti-money laundering laws.”
By Neils Christensen of Kitco News; email@example.com