Blockchain and Law - The Challenge of Anonymity

Ira Chandershekar
Mar 31, 2022
3 min read

According to Collin’s Dictionary, 2021’s word of the year was “non-fungible token,” otherwise more commonly referred to as NFT (2). As one would expect, the popularization of blockchain jargon points to the extensive influence of the metaverse, digital art, and cryptocurrency in contemporary society. Blockchain is a decentralized digital algorithm that is primarily used to buy and trade cryptocurrency. In a perfect world, the anonymity of blockchain technology increases user privacy and reduces cost. If blockchain technology is imbued with a number of benefits, how could blockchain and cryptocurrency truly be problematic?

Well, here’s the complication: blockchain is entirely unregulated and unfairly taxed. Without sufficient fintech (financial technology) regulation, the very function of criminal law and taxation dwindle.

Taxation:

As per the Bank of Canada Act, cryptocurrency does not qualify as legal tender, and as a result, such assets are retracted from classifying as legitimate “money” (3). Instead, cryptocurrency is treated as a commodity or security, regulated by the Canadian Security Administrators (CSA) (3). This implies that cryptocurrency exchanges are treated as barter exchanges, as per the Canadian Revenue Agency (CRA) (4).

Recent statistics estimate that the total transaction value of digital payment is expected to reach $6.7 trillion by 2023 (5). Needless to state, this means that a towering amount of wealth is accumulated through the medium of blockchain technology. The lack of taxation enables the rich to continue growing richer without an obligation to promote income or wealth distribution; since cryptocurrency purchases are untaxed, the Canadian government solely taxes crypto holders through capital gains or business income taxes (4). Unlike standard income taxes, capital gains taxes are significantly lower; capital gains tax only levies from 50% of the net profit gained through crypto assets (4).

The problem with cryptocurrency is not taxation itself, but rather, the lack of stringent regulations that monitor whether Canadians are reporting crypto assets on their annual tax returns. Tax evasion with cryptocurrency is rampant, and the CRA reports that Canada has a total of over $177 billion in lost revenue as a result of tax avoidance (1). It is blockchain technology’s anonymity that shields tax evaders from tax crimes.

White-Collar Crimes:

The problems with deregulated fintech do, in fact, get worse. Blockchain algorithms serve as the perfect platform for white-collar crimes; tax evasion, ransomware attacks, and fraud often plague standard fintech platforms such as Coinbase, MetaMask, and Binance (6). Without regulations, the perpetrators of such crimes will simply be acquitted while profiting off the illegal gains. Currently, Canadian legislation is seeking to upkeep investor protection; however, it is particularly difficult to enforce investor protection regulations when anonymity blankets any form of investigation or traceability.

The lack of laws and regulations that address criminal penalties for fintech crimes translates to a large vulnerability for investors on the platform. In the case that an investor’s funds are drained due to a faulty crypto investment, virtually no regulation or law exists to penalize the issuer or compensate such losses (6). Through blockchain technology, investor protection does not exist.

As per Chainanlysis, an independent blockchain software, “$7.8 billion of the overall $14 billion worth of criminal activity is from scams” that manipulate investors into purchasing illegitimate cryptocurrencies (7). The most common type of fraud—-commonly referred to as a rug pull—has illegally garnered $2.8 billion from crypto holders on decentralized finance platforms (7). The lack of regulation to inhibit such crimes from occurring is encouraging white-collar criminals to resort to decentralized finance platforms for scams, frauds, and ransomware attacks.

At the crux, blockchain’s anonymity is the main challenge to enacting laws and regulations that seek to address crimes and tax evasion. Without adequate investor protection, every user of financial blockchain technology is jeopardizing their individual security. Although Canada is playing a game of catch-up with the development of digital finance regulations, the current absence of laws pertaining to blockchain technology is a threat. In essence, regulation weaves security into the fabric of anonymous digital transactions.

Endnotes

Canada Revenue Agency. “Government of Canada.” Canada.ca. / Gouvernement du Canada, October 2, 2021. https://www.canada.ca/en/revenue-agency/campaigns/tax-evasion-no-borders.html.
“Collins - The Collins Word of the Year 2021.” Collins Online Dictionary. Accessed February 15, 2022. https://www.collinsdictionary.com/woty.
Gustav, John. “Canadian Securities Regulations for Cryptocurrency Businesses.” Sia Partners. Accessed February 15, 2022. https://www.sia-partners.com/en/news-and-publications/from-our-experts/canadian-securities-regulations-cryptocurrency-businesses.
Jackson, Cedric. “Is Cryptocurrency Taxable in Canada.” KOHO. Accessed 2022. https://www.koho.ca/learn/is-cryptocurrency-taxable-in-canada/.
Juljia, A. “Fintech Statistics Showing an Industry on the Rise.” Fortunly. Accessed February 15, 2022. https://fortunly.com/statistics/fintech-statistics/.
“Latest Crypto Regulation Talks | TIME.” Time. Time, November 2, 2021. https://time.com/nextadvisor/investing/cryptocurrency/crypto-regulation-talks-heat-up/.
Vanian, Jonathan. “Crypto Crime Just Hit an All-Time High of $14 Billion.” Fortune. Fortune, January 6, 2022. https://fortune.com/2022/01/06/crypto-crime-all-time-high-2021/.