Anyone who remembers the movie “Reefer Madness” understands that sometimes government warnings are exaggerated.  According to the classic anti-marijuana movie a simple puff on a marijuana cigarette would turn an innocent person into a homicidal maniac. This movie was almost 80 years ago but we can see the same tactic being used today with respect to cryptocurrencies.

Before Canada become one of the first countries to regulate Bitcoin, its Finance Department issued a memo back in May 2013 prepared for former finance minister Jim Flaherty, saying that the digital currency has raised flags about its potential to fund criminal activities. An excerpt from the memo reads:

"Virtual currencies such as Bitcoin have been criticized for their potential to fund illicit activity, such as money laundering and terrorist financing."

- Jim Flaherty

While this is very true, the government’s approach is somewhat puzzling if crime prevention is really the issue for several reasons. The Bitcoin Foundation Canada recently released a report that indicated that Bitcoin was no more likely to be used by criminals than any other tradable commodity, such as currency, precious metals, gems and many other things.

And this brings us to another reason for the puzzlement. Why the stress on Bitcoin or cryptocurrencies while totally ignoring the same problem with other tradable commodities?

One study conducted by the United Nations Office on Drugs and Crime (UNODC) estimated that in 2009 criminal proceeds (from drugs and criminal organizations) reached 3.6% of global Gross Domestic Product (GDP) and 2.7% (or more than US$1.5 trillion) being laundered. The study did not take into account the hundreds of billions of dollars annually that disappear from the economy in low level crimes such as by independent drug dealers and sales of stolen merchandise for cash.

The fact is, however, that Bitcoin is already regulated. This is a point made by the Bitcoin Foundation of Canada and several other organizations, including the new Bitcoin trade association, Digital Chamber of Commerce. But it is the value of something not its anonymity that enables criminal activates.

A one-hundred dollar bill has essentially the same level of anonymity when passed between two people as Bitcoins. Laundering that one hundred dollar bill is illegal because that bill is considered taxable income and for all practical purposes the same laws apply to cryptocurrencies. Understanding this is essential to understand the governments concern with money laundering.

Under the current system, with complete government control, more than US$3 trillion is lost to tax evaders globally according to the report released in 2011 by the World Bank. This was long before Bitcoin had even appeared on most economists’ radar. While there are many ways to avoid paying taxes such as having an off-the-books job. This relieves employers from paying both taxes and pesky things like unemployment, accident insurance, and the employee from paying income taxes or FICA.

But here is a point that is missed in all of these reports. When criminals trade suitcases of money between themselves there is absolutely no way to trace that money. But when someone makes a Bitcoin transaction their identity might be hidden but their IP address is a part of the public ledger and can be traced, which theoretically makes Bitcoin more transparent and resistant to money laundering than fiat.

The same reasoning applies to protecting consumers. In May of 2013, criminals took more than US$45 million cash from ATMs in the New York metropolitan area. There were no warnings not to use cash. Mt. Gox is vilified and used endlessly as an example of why Bitcoin cannot be trusted as if Bitcoin itself was responsible for managing Mt Gox client assets.

- Mark Karpeles, Mt. Gox CEO

When the big banks crashed the economy after being deregulated, the governments answer was to continue to deregulate and bail them out while encouraged by the media. Governments have both a right and a responsibly to levy and collect taxes that pay for the vital services needed by the citizens and Bitcoin must be considered taxable income just like any other currency. But the motive for reports like the Canadian report is suspicious because they try to deflect attention away from the real reason with a series of straw man arguments.

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