05/29/2014 07:20 EDT | Updated 05/29/2014 09:59 EDT

Canada Is World's 2nd-Largest Bitcoin Investment Market: Report

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Canada is the world’s second-most popular destination for Bitcoin investment, according to a new report from a Montreal think tank. But , it warns, the country’s economy will miss out on a Bitcoin-fuelled boost if Ottawa doesn’t clarify the digital currency’s legal status.

In Canada, some $10.5 million of venture capital is invested by two companies, putting it at a distant second behind the $68.1 million invested by 16 companies in the U.S. Canada sits just ahead of China’s $8 million in the ranking of the top countries for Bitcoin venture capital investment.

Fans believe digital currencies are the future of banking because they are not tied to any one central bank, giving users a degree of never-before-seen independence.

However, several changes need to be made in order for the virtual coin to gain widespread recognition, said the report from the Montreal Economic Institute.

The report’s author, David Descoteaux, warns that the success of the currency hinges on government decisions on how Bitcoin is taxed and regulated.

Many Canadian banks have shut down accounts belonging to Bitcoin companies for fear of breaking existing anti-money laundering laws. Cointrader, which launched the world’s first Bitcoin ATM in Vancouver, said earlier this year that it was considering relocating its headquarters outside of Canada after the Bank of Montreal closed its account.

“Without basic services like a simple business bank account, many Bitcoin companies will choose to set up shop elsewhere, leading to economic losses for Canada,” wrote Descoteaux.

The Canadian government announced in its most recent federal budget that it was looking to make legislative changes to cover digital currencies in anti-money laundering laws, which could possibly expand the definition of a legal money services business to include Bitcoin exchanges.

“If these changes materialize, this clarification of rules would be a positive development for Bitcoin in Canada,” Descouteaux said.

Changes could encourage banks to allow Bitcoin companies to hold accounts because they would give specifics as to how digital currencies are regulated, he added.

The current lax regulation in Canada has so far allowed Bitcoin company development. For example, Canada doesn’t tax capital losses or gains on Bitcoins, whereas the U.S. does.

In order for development in Canada to continue, the government does not need to accept Bitcoin as a legal tender, Descouteaux said. It just has to avoid regulating Bitcoin to the point where it can’t be used similarly to ordinary currency.

Bitcoin is the most popular of a spate of digital currencies that have been threatening a shakeup in financial business the way disruptive technologies have revolutionized the music, movie and news businesses. The unchartered digital currency is free from interference from any central banking authority, financial institution or middle man.

Because of the anonymity behind transactions, which are logged in a public ledger but are not tied to a bank account, it has also garnered attention from those who want to mask their activities. That’s made governments wary of potential criminal implications.

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