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Based on its technological innovation, low energy costs, high internet speed, and favorable regulatory environment, Canada has emerged as a leading crypto and blockchain nation. While it ranks third in the world behind the U.S. and the U.K. when it comes to embracing blockchain technology, its homegrown Ethereum (ETH) blockchain technology, adoption around the world with a wide variety of applications in finance, government, legal, health, education, space, national and multinational cryptocurrencies, energy, Initial Coin Offerings (ICOs) and others is unparalleled.
A study conducted by Cornell University shows that, “The Ethereum nodes are both in the latency space, and also geographically, more distributed around the world, as opposed to Bitcoin nodes, which tend to be located in data centers” explained Emin Gün Sirer, a professor and computer scientist at Cornell.
A Center for Blockchain Innovation
Canada’s dominance in Blockchain innovation stems in part from Toronto being home to Vitalik Buterin – inventor of the Ethereum blockchain – a second-generation open source software platform with a general scripting language which created a protocol for building reliable decentralized trusted networks. It extends the functionality of Satoshi Nakamoto’s Blockchain design which powered decentralized peer-to-peer Bitcoin (BTC) payment, by adding the concept of smart contracts, also called scripting. It is now the world’s second largest cryptocurrency, behind only Bitcoin in total market cap.
This feature of ETH allows the platform to store and run computer programs and enables developers to build and deploy decentralized applications and create whatever operations they want with permanent, trusted record of assets, and transactions. The first public Ethereum backed network went live in 2015 and supports Ether (ETH). ETH finances the Ethereum Swiss Foundation and is used by application developers to pay for transaction fees and services throughout the Ethereum network.
The platform has worldwide adoption. As Nick Johnson, the chief software architect of Ethereum Foundation, puts it:
“We are building a bridge between the human readability of cryptographic addresses and machine readability. While some others are working similar platforms that they feel may have their own advantages, the size of the development teams around Ethereum ballooned with initial spikes in interest to something larger than anything else in the space. With that, application development, innovation in scaling and other areas followed the trend, thereby creating a snowball effect.”
Ron Resnick, Executive Director of the Enterprise Ethereum Alliance (EEA) which launched last year adds:
“EEA serves as the connective tissue between Ethereum Blockchain and the evolving enterprise industry with over 450 members from all around the world – 135 in the Banking Work Group – which are driving production deployments through a community of over 30,000 developers.”
Another example is ConsenSys, an EEA member firm. It’s involved in various Ethereum projects including JP Morgan’s Quorum the EU Blockchain Observatory and Forum, along with training Ethereum developers at its Academy.
The EEA is also a member of the Toronto-based Blockchain Research Institute (BRI). According to co-founder, Alex Tapscott, BRI is dedicated to over 70 research projects that proposes ways in which Blockchain technology can be utilized to impact various industries. BRI has also partnered with the Information and Communications Technology Council of Canada (ICTC) to build a Canada-wide blockchain ecosystem; alongside the Bank of Canada, which has explored and experimented with a national cryptocurrency.
Crypto Mining
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It’s not only blockchain innovation where Canada excels. For example, according to Hydro Quebec, the province has an energy surplus equivalent to 100 terawatt hours over 10 years and offers some of the lowest electricity rates in North America. This has drawn crypto miners to the region – including from as far away as China – in droves. A crypto miner’s easy, breezy lifestyle starkly contrasts that with a traditional precious metals miner who works up to 5,500 feet below the earth’s surface – at suffocating temperatures, dripping with sweat, while punching holes into burning rock walls – to find hidden treasure in the dark.
Case in point, China's Bitmain Technologies began mining in Canada in 2016, when ETH traded at about a dollar. When ETH’s price rose 63,600% to US$636, with no implemented hard cap on the total ETH supply, Bitmain first announced a new specialized mining system exclusively for ETH. It then set its eyes on cryptocurrency mining sites in Quebec, taking on average 29.05 TWh annually to operate a cryptocurrency mining operation. That's about 0.13% of total global electrical consumption.
While this may be potential bad news for the smaller crypto miners in the region, a local ETH miner shrugged it off:
“Quebec is one of the best places in the world for mining, thanks to low cost electricity, cool temperatures, and high-speed internet. There's a lot of data centers in Montreal and they'll rent you a space for your own server or ZTE smartphone – Sugar S11. Since you'd be paying about half to 1/3rd the electricity price of Ontario, then the added expense of rent is well worth it”
In March 2018, Quebec Premier Philippe Couillard warned that “Cryptominers planning to move to the region will not get cheap electricity from the government-owned utility Hydro-Quebec, as the utility may not have enough power to meet the demand.” In June, according to the Montral Gazette, the Quebec government issued a plan to charge crypto miners and blockchain companies 15 cents per kilowatt hour premium to– about double the rate paid by Hydro’s residential clients.
Light Cryptocurrency Regulation
As the long-held economic theory goes, excessive regulation stifles innovation. Accordingly, Canada lightly regulates cryptocurrency/ICO/tokens. And, it offers a wide selection of federal and provincial government incentives to aid and assist startup tech companies.
Last year, with the boom in ETH blockchain based ICOs that raised US$4 billion worldwide, Canadian securities administrators suggested that the country’s securities laws may be potentially applicable to cryptocurrencies. On the other hand, the Ontario Securities Commission (OSC) granted regulatory relief to allow Ontario’s first regulated ICO under existing exemptions in securities laws.
And the British Columbia Securities Commission (BCSC) approved Canada’s first registered cryptocurrency investment fund, acknowledging that it views cryptocurrency investments as a new and novel way to invest. This ruling allowed pension, investment, and venture capital funds – including the Ontario Municipal Employees Retirement System’s Ethereum Capital – to invest in cryptocurrencies and tokens.
This year, amid extreme crypto market volatility, Canada’s first blockchain exchange-traded fund began trading on the Toronto Stock Exchange (TSE). And, the OSC started examining the business activities of several exchanges on the concern that they were allowing trading in tokens that would otherwise qualify as securities.
Cryptocurrency Taxation with Incentives
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The Canada Revenue Agency (CRA) began taxing cryptocurrencies in 2013. But to bolster technological and scientific innovation federal and provincial governments provide various R&D tax incentives.
Laura Gheorghiu, a tax partner at Gowling WLG, explained that the CRA has characterized cryptocurrency as a commodity, therefore the exchange of it becomes a taxable event as a barter transaction. In turn, this gives rise to either business income (fully taxable) or capital gains (50% taxable), depending on the facts and circumstances as measured according to the value of the assets exchanged in Canadian Dollars.
If a cryptocurrency is held as a capital asset (like an investment), then the gain is classified as a capital gain and taxed accordingly. If the cryptocurrency is situated, deposited, or held outside of Canada – directly or through funds – the taxpayer must adhere to foreign reporting rules.
If an employee receives cryptocurrency as payment for salary or wages, or otherwise in connection with employment, the amount – computed in Canadian dollars – is included in the employee's income. Mining of cryptocurrencies is taxed as either a business or a “personal hobby” (non-taxable).
Business income, wages, or capital gains are taxed at the applicable tax rate for the taxpayer in question. The general combined federal-provincial income tax rates in Canada vary between 26.5% to 30% for corporations, and 44.5% to 58.75% for individuals, depending on the province.
A non-resident that carries on a business in Canada, is subject to taxation under the same rules as a Canadian resident. Cross-border payments of rents or royalties in cryptocurrency to a non-resident are subject to a withholding tax of 25%, whicht may be reduced under an applicable tax treaty.
Personal tax returns are due at the end of April and corporate tax returns are due six months after the fiscal year-end of the corporation.
In Summary
It’s been suggested many times by many industry experts, that the internet's second blockchain era will produce even more upheaval than the internet's first information era. Experts like Alex and Don Tapscott call it an unstoppable force that will make itself felt in almost every facet of our lives.
Time will tell, but the force has already been felt throughout the financial, tech, and investment communities in Canada…coast to coast.