Exercising caution with digital currencies: A guide for Canadians

As traditional investments face growing uncertainty, more Canadians are increasingly exploring digital currencies like Bitcoin, Ethereum, and Dogecoin — drawn by both potential and accessibility. However, with the rapid growth of the digital currency market come significant risks that must be carefully navigated. While digital currencies offer exciting opportunities, it’s crucial for Canadians to approach them with caution and to understand the risks involved.

Understanding the risks

One of the most notable characteristics of digital currencies is their extreme instability. Prices can fluctuate wildly in a short period, as seen with Bitcoin’s meteoric rises and sudden crashes over the past decade, or newer tokens that gain rapid attention only to collapse in orchestrated ‘pump and dump’ schemes. While this volatility can present lucrative opportunities, it also comes with the potential for substantial losses.

Before diving into the digital currency market, it’s essential for Canadian investors to assess their risk tolerance and financial goals. Cryptocurrencies should not make up the bulk of an investment portfolio, and you should be prepared to lose when you invest. If you’re considering investing, treat it as a high-risk, speculative investment and ensure it doesn’t jeopardize your financial health.

Security risks and scams

The decentralized nature of digital currencies means that transactions are peer-to-peer, without the oversight of a central authority like a bank. While this can offer increased privacy and security, it also opens the door to various scams and cyberattacks. Canadians reported losses in the millions due to cryptocurrency fraud, with some victims ultimately filing for insolvency. 

Common scams include Ponzi schemes, phishing attacks, fake exchanges, and pump-and-dump tactics involving manufactured hype around new tokens. It’s essential to exercise extreme caution when engaging with any cryptocurrency platform, exchange, or individual. These scams often feature personas or characters designed to build trust and encourage quick investment, only to disappear once funds are secured. 

The Edmonton Police Service offers a helpful guide for identifying the hallmarks of a crypto scam before you invest: Cryptocurrency Investment Scams

Because the cryptocurrency space remains largely unregulated in Canada, investors have little protection or recourse when things go wrong. Always verify the platform's legitimacy, and never share your private keys or sensitive information with anyone.

Legal and tax considerations

Cryptocurrency is not considered legal tender in Canada, but the Canada Revenue Agency (CRA) treats it as a commodity. This means that any profit made from trading or investing in digital currencies is subject to taxation, either as capital gains or business income, depending on the nature of your activities.

Canadians should maintain accurate records of their transactions for tax purposes and be aware that tax laws related to cryptocurrency are continually evolving. Failing to report cryptocurrency income or transactions to the CRA can lead to penalties and interest charges. Consulting with a tax professional who understands cryptocurrency is advisable to ensure compliance. If you find yourself with an unexpected or unaffordable tax plan, reach out to an Insolvency professional to understand your options.

The risk of loss of access

One of the biggest risks with digital currencies is losing access to your funds. Cryptocurrencies are stored in digital wallets, which are protected by private keys. If you lose your private key or if it is stolen or compromised, there is no central authority to help recover your funds. Unlike traditional banking systems, cryptocurrencies do not offer customer service or account recovery mechanisms.

Canadians should take extra precautions to secure their private keys, such as using hardware wallets or multi-signature wallets. Backing up important information and maintaining a secure, offline storage system for keys are critical to minimizing the risk of losing access. Also, ensure that external hard drives are properly wiped before disposal.

There is no insurance for digital currency holdings in Canada like the Canada Deposit Insurance Corporation (CDIC) provides for bank accounts. This lack of oversight means that if a platform is hacked or goes bankrupt, you may not be able to recover your assets.

To reduce the likelihood of encountering this issue, it’s vital to use reputable and well-established exchanges and avoid investing more than you can afford to lose.

Regulatory landscape in Canada

While Canada has a relatively progressive stance on digital currencies, the regulatory environment is still evolving. In 2023, the Canadian government introduced new measures aimed at providing clarity around the taxation of cryptocurrency and preventing money laundering. However, cryptocurrencies are still not fully regulated, and this lack of regulation can expose investors to heightened risks.

It’s important to stay up-to-date with the latest regulatory changes, as the Canadian government may introduce additional rules or restrictions that impact digital currency holdings. Keeping informed about these changes will help ensure that you’re complying with Canadian law and minimizing your exposure to risks. You may wish to talk to your local MNP advisor to understand recent updates or changes to the law.

Treatment in Insolvency

Digital or Crypto Currency is considered a non-exempt asset in Canada in insolvency filings. It is available to the creditors and susceptible to creditor action if no formal protection is in place. If you have digital assets, you may be able to keep them through a consumer proposal or a repurchase agreement with the Trustee. If you are considering a debt solution and have these kinds of assets, contact one of our Licensed Insolvency Trustees to review your options.

While digital currencies offer numerous opportunities for Canadians, they are also fraught with risks. The volatile nature of the market, the potential for scams, and the lack of regulatory oversight can make the digital currency space a challenging landscape to navigate.

In the ever-changing world of digital currencies, understanding the risks and knowing how to manage them is crucial to maintaining financial security.

If you or someone you know has been a victim of a crypto scam and is no longer able to manage debt repayments due to this loss, contact a Licensed Insolvency Trustee (LIT) like MNP Ltd. for a free, no-judgment, no-obligation consultation.