THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
EVIDENCE
OTTAWA, Wednesday, April 9, 2014
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon, ladies and gentlemen, and welcome to our meeting. I have to inform those around the table, and our listening public, that due to a vote that is taking place in the Senate chamber at 5:30 today the committee will suspend at 5:10 p.m., to allow members to return to the chamber for the vote. The committee will then resume after the vote, which will be at approximately 5:45 or 5:50.
Today the committee is holding its fifth meeting as part of its study on the use of digital currency, which began two weeks ago with a presentation by the Department of Finance. We have subsequently heard from several academics, as well as the Bank of Canada.
In testimony, government officials made reference to bitcoin ATMs, which currently operate in a number of Canadian cities, including in Ottawa. Officials also presented the receipt of a bitcoin purchase processed by Calgary-based Canadian Virtual Exchange, better known as CAVirtEx.
As follow-up, we are pleased to welcome today Mr. Kyle Kemper and Ms. Victoria van Eyk, partners with the Bitcoin Strategy Group, to give a presentation on the everyday uses of bitcoin. They have actually brought along, as you can see, a bitcoin ATM.
We also welcome Mr. Joseph David, President and CEO of CAVirtEx, who is joined by his adviser, Mr. Larry O'Brien, to discuss the role of bitcoin exchanges.
The presentations, which will take approximately 20 minutes each, are to be followed by the live purchase of a bitcoin using the ATM led by Mr. Kemper and Mr. Haseeb Awan, co-founder of the ATM's manufacturer, BitAccess.
I hope to finish the presentations and demonstrations before suspending at about 5:10, so I would ask that we keep things moving along and that members wait to ask questions following the demonstration.
We have arranged that the room and the witnesses will be available after the meeting, should members have follow-up questions or want to purchase some bitcoins themselves.
I now turn to Mr. Kemper for his presentation.
Mr. Kemper, the floor is yours. Particularly, I would like to express our appreciation for the effort that you have put in to bring your machine along with you.
Kyle Kemper, Partner, Bitcoin Strategy Group: You're most welcome, Senator Gerstein. Thank you to all the senators for having us here.
We are here today to showcase, using examples, exactly how one purchases math-based currencies; specifically bitcoin. Before we get into this, though, I want to quickly explain the opportunity that Canada has been presented with.
Due to our laissez-faire stance on bitcoins so far, Canada has become one of the leading countries in terms of bitcoin entrepreneurship and innovation. From Vancouver to Saint John, people are coming together to take advantage of this opportunity.
Around the world, countries like Germany, Australia, the U.S., Singapore, Luxembourg and South Africa are actively trying to understand how bitcoin relates to finance, taxation, commerce and innovation.
We have an opportunity before us to become a global leader on this bitcoin opportunity. Before we can come to any conclusions, we must understand what bitcoin is, how it works and what the future with bitcoin may look like.
As we know from previous presentations, bitcoin by definition is a decentralized, open-sourced medium for sending value over the Internet. We are not here to talk about the science behind bitcoin, but instead how the average user gets into it, starting with the creation of a bitcoin wallet.
My colleague, Victoria, is now going to introduce a bitcoin wallet.
Victoria van Eyk, Partner, Bitcoin Strategy Group: Good afternoon, honourable senators; thank you for having us. I'm here to talk about bitcoin wallets.
Everyone who uses bitcoin needs a wallet to store their bitcoin in. Bitcoin is similar to traditional currency in this way. We can spend it, we can save it for later spending, we can hold it for speculative purposes or we can transfer it to people around the world.
This is no different from fiat. We keep spending cash in our wallets to have on hand, we keep a slightly larger balance in our chequing account to do routine transfers and we should keep the majority of our money in investments that allow our money to grow. Please keep this in mind when we talk about bitcoin.
The first way to store bitcoin is through a hot wallet. A hot wallet is an application that is connected to the Internet that allows me to send bitcoin using my browser on my computer or from my phone.
Like a real life wallet that we keep our cash in, or a chequing account, we only keep a minimal amount in a hot wallet, usually our spending money or what we like having on hand. For the bitcoin we want to keep and spend at a later date, we use cold storage or an off-line wallet.
The majority of users of bitcoin keep their bitcoin in cold storage, as it is considered the safest way to store bitcoin. Cold storage, or an off-line wallet, is not connected to the Internet. An example of cold storage would be a USB stick or a hard drive. Some bitcoin users take security a step further and use deep cold storage. An example of this would be keeping bitcoin on a USB stick in a safety deposit box.
As you can see, there are a few ways to store bitcoin and it is very important that everyone who uses bitcoin understands these different ways to store it.
Before I can store any bitcoin I need to acquire some, so I'll turn the scene back to Kyle and he will explain how we go about doing this.
Mr. Kemper: Broadly speaking there are three ways a person can acquire bitcoin. You can buy bitcoin directly off another holder, you can buy from an exchange, or you can buy from an ATM like the one we have right here.
I will start by talking about how you buy it directly from another person. To actually do this we will physically sell bitcoin between the two of us to show that I would like $20 and I will buy it from Victoria, who is a bitcoin holder. The first thing we do is I show Victoria my public key. My public key is a QR code that represents my bitcoin address. I show it to Victoria and she chooses to scan a public key from her wallet. She then inputs the amount of bitcoin she wants to send to me and her phone will actually do the conversion.
Effectively, 0.08 bitcoin is $20. Victoria presses “send” and it goes through some kind of packaging it all up and then on my side, as soon as the transaction happens, the value of those bitcoins, the ownership of those bitcoins that are held in her account, come directly over to mine.
Senator Ringuette: Can you give her the $20?
Mr. Kemper: As soon as I receive it, it's $20. I have purchased $20 worth of bitcoin from her.
Ms. van Eyk: Thank you, sir.
Mr. Kemper: Would you like to see, Senator Maltais? Please verify it's real.
The transaction has just shown up in my wallet. That is the primary way that many people transact in bitcoin and there are sites that allow for the direct connection of purchasing parties.
Joseph David is the CEO of CAVirtEx, Canada's largest bitcoin exchange, and he will now present on his exchange.
Joseph David, CEO, Canadian Virtual Exchange (CAVirtEx): I first want to say it's an absolute honour to be here in Ottawa to talk to government and to educate you and tell you about the movement that has been going on in Canada and how Canadians are embracing bitcoin, as you are about to see.
Our objective is to explain how bitcoin works and the challenges we face, as well as discuss how government can help foster adoption. We will go through an introduction to the bitcoin exchange, development and acceptance of bitcoin by merchants and the challenges faced.
First I will start with the introduction to the bitcoin exchange. This is a definition slide. Whenever you see the abbreviation “BTC” I'm referring to bitcoin. It's the first virtual currency to achieve widespread adoption, the most popular and it's like the virtual gold. The analogy of gold and silver makes litecoin, with the abbreviation “LTC,” the silver to bitcoin's gold.
The reason I'm showing litecoin is simply because we accept it but the focus of this presentation is only on bitcoin.
Before CAVirtEx came along, the only way you could get bitcoin was person to person, cash transfers, literally meeting at a Denny's coffee shop and exchanging cash and performing this transaction you just witnessed right here.
The other way you could do it is by email money transfers, from person to person. Those are very prone to fraud, so that was not a real good way to get them. When my friend came to me in January 2011 and said, “This is ridiculous, Canadians want bitcoin, there's no exchange, let's make a Canadian exchange, that's when we started.
The bottom example shows that to this day you don't have to use a Canadian exchange. You can wire transfer your money to Europe or Japan and buy bitcoins internationally, even to this day and before VirtEx came along. If you do that frequently your Canadian bank account will be shut down. I am giving personal testimony to you now to tell you that two of my personal accounts with Canadian banks have been shut down when they asked me what was being transferred and I responded with the truth that it was bitcoin and they shut my accounts down. There is a big danger to transferring money internationally offshore.
CAVirtEx is the first and largest bitcoin exchange in Canada. We launched in June 2011. Thirty-four months of operation makes us one of the oldest exchanges in the world. We only service Canadian citizens and residents. That is my decision, that is the vision of my company and I believe it gives us more security to remain in Canada and not to even think about going offshore because there is so much opportunity in Canada.
We have 40,000 customer accounts in Canada today. With the mind-boggling and staggering number that I showed you, we have traded over C$80 million into and out of bitcoin in Canada. This warrants your attention, I think — I hope.
What is a bitcoin exchange? It's a simple act of buying and selling bitcoins with Canadian dollars. We, the exchange, don't sell bitcoins. We simply match a buyer of a bitcoin who has Canadian dollars, and a seller of a bitcoin who wants Canadian dollars. We simply match them and charge a fee for that match.
This is a 34-month price chart for reference purposes that shows the enormous rise of the bitcoin. You can see that in June 2011, when we started, all the way up until about March, the bitcoin price was C$5 per bitcoin. You will then see a rapid increase to over C$1,000 and then you'll see a decline to about C$500 where we are today. Current price of bitcoin is around $500.
On the compliance side, we've always been proactive, and followed all FINTRAC money service handling regulations.
This outlines the statuses you must obtain to even work with VirtEx. If you are unverified, with just an email, you can't do anything with us. If you are level one, you must become level one- or level two-verified and have all of these requirements to proceed. Once you are level one- or level two-verified, you can start seeing the methods here where you can start depositing via online bill payment, wire transfer or direct debit, which is where we withdraw money from your Canadian bank account. Again, we only serve Canadian citizens with Canadian bank accounts. “Withdraw” means that we can send you Canadian dollars for the bitcoins you've sold. You can see that, at level two, we can send you $500,000 per month for the bitcoins you've sold.
I will now go through a step-by-step of exactly what to press and how to buy a bitcoin on our site. You have become level one-verified. You're going to press “deposit funds.” You're going to say, I want $500 of bitcoin. The method I'm going to choose is online bill payment. You now make the payment with your online bank, and you wait two to five days for email confirmation. Banking takes time in the Canadian-dollar world. Once you get the email confirmation, your balance of CAD will increase to $500. You now have Canadian dollars on our exchange, ready to purchase a bitcoin. You then go to our open trades and look at the prices. On the left-hand side, you will see buyers with Canadian dollars. On the right-hand side, you'll see sellers with bitcoin. For this example, the top seller is willing to part with his bitcoin for $484 Canadian. This was taken three days ago. We are going go ahead and purchase it. We put in the amount of bitcoin as one. We see the price there of 484, with a total of $491.26, including our fee. We simply press “buy,” and our balance changes instantly to 1.000 bitcoin. Our CAD balance dropped from $500 down to $8.74 remaining because we just bought a bitcoin. We didn't have to buy one bitcoin. We could have bought a decimal portion as well.
Once we have that bitcoin, we can then withdraw it immediately from the exchange. We can send it immediately to whenever we want, or we can keep that bitcoin on the exchange. If you choose our exchange to hold the bitcoin, we use a security measure called a “hot wallet”. What that means is that only 2 per cent of customers' bitcoins are actually held on our website. In the event of a hack or a physical theft of our equipment, only 2 per cent of your bitcoins would be lost. We keep the other 98 per cent in cold storage, offline, in paper wallets — not USB sticks but actual paper wallets that have passwords — and we use a large matrix of people and different levels to administer this cold storage and refill the hot wallet as necessary.
On the merchant side, my dream for bitcoin adoption is to have every single online merchant accept bitcoin as an option on their checkout page. Here is what I envision. You go to your favourite store online. You have never heard of bitcoin before, and you see the following: standard payment method, $500, for the clothes you are shopping for, let us say. Bitcoin says $450. The first question you might ask yourself is, “Why is it cheaper in bitcoin?” The second question you are going to ask is: “How do I get this thing called a bitcoin?” That creates awareness. I have a sales force trying to sign up online merchants as we speak.
Here is a real brick and mortar example of the standard pub in downtown Ottawa where you can buy a beer and chicken wings for $20 Canadian in cash, but, if you pay in bitcoin, via your mobile phone, you will get a $6 discount and get your beer and chicken wings for $14 in bitcoin equivalent, as long as you pay in bitcoin.
Why are merchants discounting bitcoin? Why is it cheaper in bitcoin? Because they love these selling points: near instant delivery, 24-7. You saw that transaction appear in six, seven seconds — very quick. No fraudulent chargebacks. This is my favourite thing about the bitcoin. As a business owner in the telecom space, at its height, my company did $1 million. Of that, $200,000 went to fraud, went to chargebacks. When I discovered that bitcoin has zero fraud and zero chargebacks, I said, “Where do I sign? I want all of my customers to pay with bitcoin.”
Transactions are not affected by banking hours or holidays. This is a 24-7, 365 day a year, on all-the-time network. We have lower fees than existing payment processors. We charge 1.5 per cent. The existing payment providers charge between 2 and 5 per cent and can't say the same things that I just said above. The current state is that we have 22 Canadian merchants online accepting bitcoin in Canada, with 150 Canadian merchants in progress, to be set up within a month, and an additional 1,000 merchants that our sales force is signing up in the next six months.
The most exciting part I want to share with you in this presentation is the question I get all the time, which is, “That doesn't sound like much. You only have 1,000 people in Canada that take bitcoin. That's not a movement. What's going on?” My answer to you is that you can take bitcoin and convert them into Canadian dollars and get a Canadian dollar debit card. You can then take that debit card and go to 58,000 regular cash ATMs, as well as 750,000 point-of-sale terminals across Canada and go shopping. The merchant has now accepted bitcoin without even knowing it because you have converted the bitcoin into Canadian dollars.
The challenges faced by the industry are great and extreme. The first is the most misunderstood concept of bitcoin, and that is that all bitcoin transactions are anonymous. All bitcoin transactions are not anonymous. They are permanently stored in the block chain, and the record of them is available at any time.
Let's take an example of Jane Doe. Below her, you see a bitcoin address. That's Jane Doe's bitcoin address. She wants to send her bitcoin to that address. Is that address an illegal supplier of guns or drugs? No, it's a flower shop. How do we know it's a flower shop? Because that's the bitcoin address on the flower shop's website, and the bitcoin information that travels through the Internet is tracked. So every single time a bitcoin is sent from Jane Doe to the flower shop to the 1,000 people on the Internet, we have that information. We, the exchange, can tell you it was Jane Doe because Jane Doe had to be level-one verified to even deal with us. You have to know your customer; you have to know who she is.
Bitcoin exchanges have all the user data and act as a choke point by regulating and sanctioning a bitcoin exchange. I will happily give you the information on all transactions.
I conducted a survey, and I gave our customers an option. I said, “If I give you guys half-price fees and go offshore, with international wire transfers only, that's option one. What if we stayed with the current fee schedule, kept banking in Canada and let you deposit by online bill payment, direct debit, and wire transfer?” Ninety-two per cent of our customers said that they want to keep us in Canada, and I, personally, want to stay in Canada.
TD, CIBC, RBC, Bank of Montreal, and Scotiabank — the five major banks in Canada — have all shut us down and refused to do business with us, citing regulatory uncertainty. Sixteen other smaller banks I tried, also in Canada, all said “No, thank you.” The good news, though, is that we do have a banking partner in Canada and are still in Canada, but we're paying great expenses in fees to remain in Canada.
Another challenge of operating an exchange is that we are constantly under attack by hackers and thieves who choose to use online attacks to try to steal our bitcoins. To date, we have never been hacked and have not lost any bitcoins or customer funds.
In conclusion, I think bitcoin is here to stay. Bitcoin transmits $300 million in a 24-hour period. It is not a little fad anymore; it is a growing phenomenon that everyone wants to embrace. We want to keep the banking in Canada. I propose that you regulate us the same way you would foreign currency transactions. Simply consider bitcoin a foreign currency. We have a money service business licence right now to be a foreign exchange dealer. If you expand your definition of bitcoin to be a foreign currency, all FINTRAC compliance, limits and KYC information would apply to us. We would report suspicious transactions. We would comply with all of our obligations under our licence.
The question is: Can government act quickly enough? Bitcoin is on light speed. We are growing dramatically and intensely. The longer we take to put regulation in place, the more difficult it's going to be for me to keep us in Canada.
I invite your questions.
The Chair: Thank you very much, Mr. David. We had explained to us that there are three ways to transfer bitcoins: the exchange as outlined by Mr. David; the demonstration that Mr. Kemper and Ms. van Eyk indicated to us; and to purchase a bitcoin. So with that, I'm going to ask my assistant Chris Reed, on behalf of the committee, to bring forth $100, and he's going to have a demonstration as to how this is going to work; is that right?
Mr. Kemper: Unfortunately, at the moment, we're having some connectivity issues, so perhaps after the break we can do a demonstration. However, Haseeb Awan from BitAccess has some comments.
Haseeb Awan, Co-founder, BitAccess: I'm Haseeb Awan. I'm a co-founder of BitAccess, our start-up. First of all, thanks, senators, for inviting us and giving us the opportunity to demonstrate this bitcoin in this honourable building.
In 2013, I and three of my co-founders founded this company. One of my co-founders, Mr. Ryan Wallace, is on that side. We started a company in Ottawa and all the manufacturing is done in Ottawa. So we kept it local.
We are a 10-member team, and we are going to 15 members probably in the next two months. That being said, I'll tell you what we do exactly.
We are a bitcoin ATM manufacturer, also known as a digital kiosk. You can go to any of the machines and buy or sell bitcoins, similar to what happens in an exchange or what happens when demonstrated by Kyle and his colleague.
This all happened but in a very secure way following FINTRAC guidelines and through all the verification methodology. Right now we are operating in 10 different countries, across 4 continents, and we can claim the first part in the world in this place. We are shipping these machines all over the world with a made-in-Canada badge.
Right now we have customers in Slovenia, Dubai, Hong Kong, U.S., Mexico, Belgium, Australia, Germany, Switzerland, and obviously Canada.
The machine that we brought here is installed in the Byward Market at the Clock Tower. The first machine was installed on January 1, 2014, at Bitcoindecentral in Toronto.
Now I come to why people would use these machines over Joseph's or the way that Kyle described. The first wave of bitcoin was when people were mining. The second wave, they went to exchange. The third wave was like a common person; if my grandmother wants to go and buy bitcoin, she probably won't make an account. It takes a lot of time, and it's much more hassle in this case. She can walk up to an ATM, do the KYC on the machine and purchase a bitcoin. Similarly, if you want to cash out your bitcoins, you can go to the same machine and take fiat for the bitcoins.
This is why bitcoins are used, because buying from individuals that you are meeting at a coffee shop is risky. You are meeting with a random person that you just met online, and walking with a lot of cash, and a transaction might happen.
Second, if you were to do the exchange, it will take two to five days. Obviously, you have to make an account and all those things. This is the third way to obtain a bitcoin, an ATM.
As I said before, we are operating across four continents, which makes it very flexible to obtain bitcoins.
So if you walk up to a machine, for a small transaction we require a telephone number. As soon as you walk up to a machine you have to enter your telephone number with a code. You have to enter that code into the machine in order to proceed, similar to the authentication that has been used by people in this room.
If you go are going down a third and foundation threshold level as being set by the compliance committee in every country, you have to scan your ID, which has face match, and it verifies this is the right person using this ID. After being verified, the person is only allowed to do the transaction. Every transaction is linked to an ID. There are no anonymous transactions.
As Joseph mentioned earlier, every transaction can be tracked down at any given point of time.
Right now, the ID technology that we are using is one of the sophisticated technologies being used in the world. We use the most advanced form of face match ID verification, which detects all the counterfeit detections for any kind of ID.
I believe we will have a demonstration of our ATM after the break. You can automatically have a small transaction, and it will tell you what our machine is capable of.
The Chair: Thank you very much. Now we've had four presentations. Mr. O'Brien, are you sure that you don't want to say a few words to the committee?
Larry O'Brien, Advisor, Canadian Virtual Exchange (CAVirtEx): Senator, It's a pleasure to be here. Which person in this lineup, because of age, doesn't belong here?
I'm delighted to be here in front of the standing committee. I'm doing this to give you a sense of my perspective on bitcoin and math-based digital currencies. My background is technology business, and, for a few years anyway, politics.
After graduating in physics in 1971, I worked 10 years in IC design and also in the development of the first digitally encrypted mobile secure communication system for the RCMP. Following those 10 years of hands-on work in the technology sector, I founded Calian Technology and led its growth from being a start-up company to a publicly traded company with over $200 million in annual sales.
During my 30 years with Calian I served with Prime Minister Chrétien's Advisory Council on Science and Tech, the ACST. I served with Mike Harris' Ontario Jobs and Investment Board, the OJIB, and I served as chair of the sectorial advisory group in telecommunications or information technology and was also elected chair of the Canadian Advanced Technology Association. I give you this background to let you know that I've been around long enough to have seen a lot of major and minor changes in the technology sector.
During these 40 years of technology and also of business, I've experienced two other major disruptive technologies: the introduction of the IBM PC in 1980-81, and also the introduction of the Internet in 1990. I can assure you that the introductions of these disruptive technologies have a lot of things in common, the most important being that most people have vastly bigger expectations of the short-term changes that these technologies will have, and they vastly underestimate the long-term impact of the introduction of these technologies.
I believe that math-based digital currency is also one of these disruptive technologies that could alter banking, trade and commerce in Canada, around the world, in the same way that PCs did for computing and the Internet has done for communications.
Traditionally, disruptive technologies have created a blizzard of these misconceptions of real or imagined reasons why the new technology should not be adopted.
As well, you will often hear reasons why a disruptive technology will fail from people with a vested interest in the status quo. Good examples are when a renowned radio expert defined TV as something that would be a flash in the pan, and the president of a digital equipment computing company said that the PC would never catch on, asking who would ever want a computer on their desk.
So these are things that you're going to hear. There's going to be a blizzard of misinformation and misconceptions about the topic of bitcoin. We all understand it. In order to understand bitcoin, you almost have to suspend disbelief for an hour or two.
But there are other challenges that need to be taken more seriously. These challenges include the potential for tax evasion, funding of terrorism, and other illegal and fraudulent activities such as fraudulent activities that can occur in exchanges, ATMs and wallets.
With respect to the first series of challenges — tax evasion, money laundering and funding of terrorism, there are certainly laws that can be applied to these circumstances and the recent arrests in the United States indicate that these laws can work.
The fraud scene in the digital or virtual currency world is without exception related to the on-ramps and the off-ramps. By that I mean the exchanges, the ATMs and the web-based wallets — the on- and off-ramps between the fiat currency or your dollar currency and the digital currency.
For example, Mount Gox closed with over $300 million in clients' money vanishing. There are multiple cases of exchanges closing their virtual doors and vanishing into the night without a trace; and there’s a reason for that. Today, in any location in Canada and the world, you can start a virtual exchange, such as the one that CAVirtEx has started, with less public oversight than if you were opening a hotdog stand. In other words, there are no regulations, no barriers to entry and no public oversight of the access to get into the on-ramp and off-ramp business. This lack of oversight has created a regulatory environment where fraud is easier to contemplate for a young entrepreneur than is building a solid business that will last forever.
The most important issue for digital currency is the lack of public oversight relating to the exchanges. As the CEO of CAVirtEx just mentioned, the industry needs the government to provide oversight and regulate the exchanges and ATMs to create confidence in the entire digital currency world. After you have done that, the market forces will determine whether they will be accepted. The market will determine on its own which digital currency wins, and the future will be determined by market forces.
The lack of oversight on the establishment of exchanges has also impacted the relationship between the exchanges and their banking partners. Banking partners have incredibly difficult times dealing with entities that aren't subject to the same regulatory scrutiny as the banks vis-à-vis inspection and security. Regulation of the bitcoin technology or the introduction of financial institution-like regulations for exchanges will not only ensure conformance with the existing laws but also better enable a working relationship between exchanges like CAVirtEx and the banking community.
The Chair: Perhaps I could start with a general question.
To set the universe that we're dealing with, how many exchanges exist, whether they're big or small? How many ATMs sell bitcoins today? How many digital currencies are we talking about that circulate?
Mr. David: The number of worldwide bitcoin exchanges doing serious business is 8 but 30 if you count every one. We're talking very small numbers worldwide.
The Chair: In Canada?
Mr. David: In Canada, to my knowledge, there are two. We are the number one and largest, and we have one competitor in Canada right now.
The Chair: Thank you. ATMs?
Mr. Awan: Right now we have 15 machines operational and 22 in total. We are controlling 70 per cent of the market.
The Chair: Is that the world market?
Mr. Awan: That's the world market.
The Chair: Do you have 50?
Mr. Awan: We have 15. People have kiosks. They just order a normal self-checkout kiosk where you can buy bitcoin, but you cannot sell. When you say real ATMs, there are probably 22 of them.
The Chair: What is the number of digital currencies besides bitcoin?
Mr. David: Bitcoin is the major one with a $13 billion market capitalization. Litecoin is in second place but far, far behind. On top of litecoin, there are 20 other copycats of bitcoin. None of them are even near a third. They're all in last place.
Ms. van Eyk: There are over 100 different alt currencies in the market right now.
Mr. David: They're all very minor. My apologies.
The Chair: Being cognizant of the clock, we have 15 minutes so I want to move to our list of questioners. Then we'll break and continue back with a most interesting presentation.
Senator Black: Thank you for your tremendous presentations.
I would like to raise a couple of questions, and you can determine how you want to respond.
Mr. Kemper, I was taken by your initial comment that you see a tremendous opportunity for Canada if we get the regulatory bit right.
Mr. Kemper: Correct.
Senator Black: Can you talk to us for a moment or two about what that opportunity looks like in your view?
Mr. Kemper: We can look at the amount of venture capital that's being put toward bitcoin innovation and the funding. Joseph might know the numbers but it's well over $50 million that has been devoted to start-up companies. We see the meet-up groups happening all across Canada where people are coming together and the passion is exuded by the young, old and ex-bankers. In all different corners of society, people are really interested in seeing bitcoin go further.
One thing I've noticed about this is that everyone who gets involved is at first a skeptic, no matter what. It's rare to meet someone who loves bitcoin the first time you tell them about it. They have questions. You go through the questions and they become a little more open to understanding it. The skeptic becomes the student and the student becomes the teacher. This path is growing and the message is getting out there.
This weekend in Toronto, the Bitcoin Alliance of Canada open membership organization will hold an expo. Joseph David is one of the sponsors, and we'll have luminaries from the whole industry coming together to discuss how we move forward.
To come back to your initial question of the opportunity, to understand what we can do and where we can go, the best thing we can do is ask questions and educate ourselves. Right now, bitcoin is kind of the first. Obviously it's the biggest and most powerful, but it's the first. It's kind of like a 14k modem in terms of adoption. Where it goes, we don't all know. In the mid-1990s, we knew the Internet was powerful and all these great things could happen; but we didn't know Facebook or Netflix were going to come from it — this powerful destructive force across all industries to what it is today.
This is the message I would like to leave with you guys going forward: Keep an open mind and don't make any rash decisions. Many different industries are being affected here. Take it one step at a time. I commend everybody here for launching an 18-month study. That is one third of the lifetime of bitcoin.
Mr. O'Brien: Can I add to that comment from an economic perspective? One of the endearing qualities from a banking perspective is the frictionless nature of bitcoin — the low cost of being able to transfer value from one organization to another organization.
I've seen a number of different studies, but if you think you're going to cut the costs of financial transactions even by 20 per cent using this distributed network, and you've got to think out 10 years, you're releasing a tremendous amount of economic value added into the economy. So there's a pathway using math-based digital currencies to reduce the cost of economic or financial transactions in the Canadian economy, which can do nothing but increase our efficiency and effectiveness as a nation.
Senator Black: Mr. Chair, I have a second question. Did you want me to wait?
The Chair: No, please go ahead.
Senator Black: Mr. David and Mr. O'Brien, you have urged us to get the regulation right. Would you be good enough to give us a primer — a one, two, three, four — of what that looks like?
Mr. David, you mentioned the concept of making you look like a foreign currency transaction firm. Is that enough, or is something more required?
Mr. David: I think that is enough. Foreign currencies are regulated very highly in banks. Take, for example, the euro. If you are doing a euro-to-Canadian-dollar transaction, the bank requires information on who you are. The bank requires limits and velocity controls to be maintained on dollar amounts. Again, all of these would apply to bitcoin. I don't see any reason to complicate it, to overthink it or to invent new rules. Just use existing infrastructure. Make it a new currency. Call it a digital currency, and put it under the foreign exchange regulations.
Mr. O'Brien: I agree with my CEO, of course, as I would have to and as I do.
Having said that, I also believe that there should be some institution-like hoops for exchanges to jump through before they become authorized to trade in digital, math-based currencies. It shouldn't be possible for two people in their underwear in their basement to start an exchange. It is too open to fraudulent activities. I think the combination of those two acts, of applying the ForEx exchange and creating institution-like criteria for using ATMs, exchanges or Web-based wallets, probably sets the groundwork to reinforce the consumer confidence in virtual currency.
Senator Black: Thank you, all. Tremendously helpful.
Senator Massicotte: Thank you very much for being with us this afternoon. The whole idea is very interesting, especially the technology of the chain of information, which is highly secure.
I understand that this whole thing started off from a libertarian — a total free-market — approach, and that was the motivation. One of its achievements — and you hear about it in much of the literature — is that it's free of government involvement and government supervision. Now, you are talking about needing government regulation, needing to give certainty or credibility to the whole process. The concern I would have is twofold. Oops, we are going away from the whole original objective of the bitcoin or other forms of currency. The other thing is: Do you appreciate the cost? If you want to be regulated like a bank or foreign exchange, you may want to form part of the payment system. I highly suspect that, at your size, you'll go bankrupt within a week. There's a lot of bureaucracy there. As you know, you have to record every transfer. You have to know your client. For any transfer in excess of $10,000, you need to know lots of information. It seems to be totally contrary to the whole issue at your starting point. Do you want to make a comment on that?
Mr. David: Yes, I would very much like to make a comment. Very simply and plainly, banks will not deal with us if there is no regulation.
Senator Massicotte: Talk to me about your experience. Was it you or Mr. Kemper who talked about when you tried to do a transfer, but it was offshore? If you did a transfer to a Canadian or to the United States, would they have shut down your bank account?
Mr. David: Yes, banks view international transfers as more risky than domestic ones.
Senator Massicotte: Is it because you were dealing with bitcoin or going offshore?
Mr. David: It was because I was dealing both offshore and with bitcoin. Offshore amplifies it. Bitcoin is also a factor as well.
Senator Massicotte: What did you want to use your bank account for; to deposit money or deposit bitcoins?
Mr. David: It was a general purpose account for investments. I actually had stocks and other investments that flowed in there as well, but the fact that I received a bitcoin incoming wire transfer for Canadian-dollar equivalent offshore, bitcoin being an unregulated thing, the bank chose to shut my account down.
Senator Massicotte: It probably relates to the fact that bitcoin, in the media anyway, has been related to being an underground network for drug dealers and so on. I presume it relates to that, and they were concerned with that issue.
Mr. David: Yes. It was because they are not willing — again, the seal of approval of regulation would calm their fears.
Senator Massicotte: I hear you; I just caution you. The bureaucracy is immense. These banks are huge, and they have multitudes of people to deal with through regulation. You can't have the cake and eat it, too.
Mr. David: Let me comment on that. We are already following the money service guidelines for foreign exchange transactions. We have a verification team. We have 25 employees in our company who are making sure that we are fully compliant. It's already being done.
Senator Massicotte: But it's not as far as Mr. O'Brien would go; he wants to be regulated like a bank.
Mr. David: No, I think what he's referring to is an additional barrier to entry beyond the MSB side.
Mr. O'Brien: Just for clarification purposes, because that's a very good point, I don't think it has to be taken to the extent of regulating a bank, but I think banks have a very difficult time dealing with entities that don't have some scrutiny because they have a lot to risk in terms of their anti-money laundering and whatever. They want to know that an organization has at least been compliant with the basic laws that will not put their own operations in jeopardy with the government regulators.
Somewhere in between having a banking licence and having a Wild West free-for-all is likely what should happen. The public sector — the government — is probably the organization that can provide that public oversight for these, without, necessarily, a great deal of additional work on their behalf because they already have the systems in place.
The Chair: I see we have only two or three minutes to go. Would you like to start, Senator Bellemare? I'm going to break at 10 after, or we can break now. I think that might be better to get over to the chamber. The vote is at 5:30. We should be back by 10 to 6. I'm sorry; this is just something that came up after we had established this. We will continue. The meeting formally ends at 6:15, but I would encourage members of the committee, the panel and our guests to stay, on a more informal basis, and we will continue after the 6:15 time period.
One question.
Senator Bellemare: It’s very small because I have another one that's bigger. I'll ask the first one. We know what the exchange does. We know what ATMs do, but what do you, the Bitcoin Strategy Group, do exactly?
Ms. van Eyk: Mr. Kemper and I are both new to the sphere, within the past year, and we see a need to make it more accessible to people. If we want bitcoin to grow and be adopted, people need to understand it, and it needs to be brought down to a level where it can be understood easily. We work with bitcoin companies on communications, doing press releases. They are very technical, lots of these bitcoiners, so, when they get on stage and are speaking to an audience, like me, for example, a lot of this is just going over my head. So we work on that, and we do government relations as well.
Mr. Kemper: Additionally, we're working to lay some of the pillars for a future kind of organization within the industry within Canada because all of the businesses need to focus on working on their products and services. The developers, last night, were working until 5 o'clock in the morning to get ready for today. It is go, go, go. This is where experts — semi-experts — come to the table as well and help to distribute their message. That is our goal, and that is the value we are adding to the market here.
The Chair: We're now going to suspend. I suspect that, when we get back, perhaps we should have the demonstration at that point.
Mr. Kemper: Absolutely.
The Chair: Then, we will continue with the questions. Thank you. We are now suspended.
(The committee suspended.)
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(The committee resumed.)
The Chair: Members of the committee, we are going to reconvene again. Thank you for bearing with us while we had our vote.
To recap, it was indicated at the first part of the meeting that there were three ways to transact with bitcoins: through the exchange, directly from an individual, or through the purchase at an ATM.
Having the ATM before us, which I understand is now live, I'm going to call on my trusty assistant to come up and work with our witnesses to affect the transaction. Can they hear you from there?
Christopher Reed, Policy Advisor, Office of Senator Gerstein: We're both miked. We should be live.
The Chair: The answer is yes. Good. The floor is yours.
Mr. Kemper: So, Christopher, the first step is to press “buy” and then you enter your phone number. This will be a small transaction. Under $3,000 is the access FINTRAC has set.
We're having a little bit of a network delay, but it should come through. So you got a code. Via SMS, it sends a verification code. The machine uses the Internet and it sends a unique code to Chris, verifying the phone number he entered and that it is him who is using the machine.
Senator Campbell: Is that a random number?
Mr. Kemper: Yes.
Senator Massicotte: And it's only used one time, right?
Mr. Kemper: Correct, but there is nothing super-secret about that number to do with the bitcoin. It is a way of ensuring that Chris is the only one using this and is at that phone number. For the ATM producer, it kind of tracks the phone number to the user.
Then it asks, “Do you have a bitcoin wallet?” If the answer is “no,” it will print you out a wallet. I will show you what a wallet looks like. This is a wallet. Then what we would do is scan it here, but Chris already has a wallet, so he can scan his wallet right now.
Mr. Reed: It's a simple QR code that I downloaded through BlackBerry App World.
Mr. Kemper: It recognizes his address and shows it there. It puts in one bill, $50, it registers, which is 0.09 bitcoin; two bills, $100, you're done. So click “I'm done,” unless you would like to enter more. That's good for now.
Now it's sending the bitcoins to him, and the whole process is basically complete. It will be a second until the bitcoins register on his wallet.
There you go. So Chris has just received bitcoin. He has bought 0.18340547 bitcoin.
Senator Massicotte: At what price?
Mr. Kemper: At the price of — he'll get a text message with a receipt of the purchase. It will say “you've purchased that much bitcoin at 5:45:24.”
Mr. Reed: And I have received the text message.
Senator Massicotte: So no commission?
Mr. Kemper: The operators of the machines charge a slight transaction fee on top of it, and that's the cost of convenience.
Mr. David: If I could interject here, as per my adviser Larry O'Brien, I'm going to give you a live quote on VirtEx so we have a basis for comparison. This is not meant in any way to undermine the price. I'm just giving you a second option.
So $545 Canadian is the ATM price, and live on VirtEx right now, you can buy it for $486. You can see people pay a premium to use the ATM, and they're willing to pay that premium.
The Chair: That transaction took about three or four minutes. Is that typical?
Mr. Kemper: Typically, it would be faster than that. There is some kind of communication issue with us being in a Senate building and the network connectivity. Right now, actually, we are going off the phone.
But when it is installed in a location that has been tested and everything is running right away, it's instant: phone number, text, enter the confirmation code, scan your wallet, put in your money. It depends how much money you're putting in. I have been at the Clocktower Brew Pub and people have put in $3,000, the full limit. You would be surprised; sometimes they’re young people, students coming in.
Senator Massicotte: You mentioned there were three ways to do it, one being cash, which obviously is an expensive way to convert, but you also said you can do a transfer. Is that by credit card or bank account?
Mr. Kemper: You can top up your exchange account via bank account, but on the ATM right now, it's just cash.
Senator Massicotte: But on the bank account, you want to confirm getting a phone number and you get a number back, but I presume you will need my bank account number and the code number to get into the bank account to do the transfer because you want to do it electronically. Am I correct in saying that?
Mr. David: Not quite. If you are talking about the exchange, I just want to correct you; we do not accept credit cards. I believe you said credit cards. No one really accepts credit cards for bitcoin because credit cards are very prone to fraud and reversible transactions.
To answer your second question, if you remember my slide about level one and level two verification, what you said is not good enough; we need government-issued ID, we need proof of address from certain forms that we accept, we may need a bank reference letter if you exceed certain limits, we do a phone verification to phone you at your Canadian phone number to make sure you are a real person and you can answer 12 questions, and this whole process may take up to a week.
Senator Massicotte: You require my account number plus the password?
Mr. David: I don't require your banking password. I only require a transit number, an account number and a financial institution ID, a three-digit number of which bank you're with.
Senator Massicotte: But if you don't have my PIN or whatever the password is, you can't get into my account.
Mr. David: Yes, I can, through a pre-authorized debit where I take the money out of your account automatically. It just comes out of your chequing account.
Senator Massicotte: Shouldn't people worry about that? That means I'm giving you a lot of information, so you've got a lot of information on me, but I have to trust you because you may dip into it a couple of times.
Mr. David: If you don't want to use the method of me directly debiting your bank account, you can choose to make an online bill payment. In that case, I don't need any of your bank account information.
Senator Massicotte: What is the delay for that?
Mr. David: It's faster than a direct debit. With online bill payments, the fastest we've had is one business day.
Senator Massicotte: I'm a member of Coinbase, which I think is the largest purse in the United States. They give you a choice of credit card and they give you cheques for a bank account. I tried all, but for the bank account, they ask for your bank account plus the whole transit number. Then you have to give your password. So I can promise you, I choose an account where I certainly don't have a lot of money because they can get into that consistently so it's a little scary. You can use a credit card, but then you have many days of delay. It's scary. I have to tell you my reaction to all of that.
Mr. David: I recognize it's scary but it comes down to reputation. We're an exchange that has a business agenda to convey trust to our customers so we're not going to start debiting your account without your authorization. It also exposes us to great risk if we do that because the banks will shut us down.
Senator Massicotte: We now understand why Mr. O'Brien was basically saying, “Give us some credibility,” because people have to trust you a lot.
[Translation]
Senator Bellemare: My question is about a feature of cryptocurrency that we discussed with experts and others, and which was considered to be a limit on the use of that currency. I am referring to the volatility of the rate of exchange to turn bitcoins into fiduciary money, coin of the realm.
Earlier you highlighted the fact that there could be a difference in the price, according to whether one bought bitcoins from your exchange or from bitcoin ATMs. That was related I believe to management fees. But we were told that bitcoins could be exchanged for Canadian dollars at a different rate in Vancouver or in Ottawa, and that there were also fluctuations over time. How are you going to deal with that, how are you trying to respond to that feature, that limit?
[English]
Mr. Kemper: I think the question is how you differentiate between the different prices in different areas of the country, and even the world for that matter.
The bitcoin price fluctuates. It very much is a market-driven price. The different exchanges carry their prices and there are different indexes that have relative price. VirtEx has its own price that is the current market price. There's another called Bitstamp that has a market price. There are exchanges in China that have equivalent price in RNB. There are exchanges in Europe that have it in euros.
When you have all these exchanges operating, it is really through trading amongst all the different exchanges that you are able to find a market equilibrium price, a global price, and it all has to do with supply and demand. It's a commodity in a sense.
[Translation]
Senator Bellemare: I understand that, and I have no problem with the concept of that volatility. But I did put the question to experts and they told us that it all depends on the demand in the other wicket. I thought: perhaps there will be people who will try to do a little speculation on the rates and so all of that might balance out. But that was not what I was told. That is why I was asking you that question. Somewhere, people who want to purchase, for instance, clothing, will calculate the cost in bitcoins, convert it into Canadian dollars and say “this is costing me more here than it does there”. Do you not think that is a limit on the expansion of the use of the bitcoin?
[English]
Mr. O'Brien: That is an extremely valid and important point, senator. In fact, there are some organizations in New York, on the New York Stock Exchange and a few other places that have early plans to create these markets for selling futures. The belief is that this will be put in play over the next 12 months to 18 months. Remember, we're really in early days of the bitcoin development process here, even though the Senate is ahead of the curve with their hearings. It's today's equivalent of saying the Internet is only for email. That's where we are today.
There are early days. There is not a lot of the infrastructure in place, but there are business plans out there right now, with a lot in the American side and some on the Canadian side, to start addressing some of these issues of volatility.
[Translation]
Senator Bellemare: I would like to add a question that is somewhat related to that, and to the fact that there is a limit on the quantity of bitcoins; we talked about 21 million, approximately. After that, it will be too costly to make bitcoins using computers because of energy costs. Can you see beyond that? Do you see some way of getting around that limit as well?
[English]
Mr. O'Brien: The protocol of the bitcoin is such that it can be divided down to eight decimal places, so you can have a milli-bitcoin or a thousandth of a bitcoin or a hundred thousandth of a bitcoin. As we get to the year 2040-41 and all of the bitcoins have been mined, I think we will start to see a growth in the value in fiat of bitcoin, but then people will start using smaller portions of a bitcoin. A tenth of a bitcoin may be worth whatever, $100 at the time.
There will be a gradual, long-term stabilization of the volatility and there will also be a gradual, long-term increase in the value of bitcoin as it is adopted by users and merchants.
[Translation]
Senator Bellemare: So that is why people also use it “as a store of value”, and there are a lot of bitcoin owners who are waiting for future developments. Thank you very much for your reply.
[English]
Senator Campbell: Thank you for coming today. This is fascinating.
My first question concerns the suggestion that if we simply made this a foreign currency under regulations that it would cover all of the bases that governments are normally concerned about.
My question is this: The government says, “Okay, we consider bitcoin a foreign currency,” and away we go. Then along comes Mr. O'Brien and he makes a “Larrycoin,” and I love the “Larrycoin” because it's a great name. It's worth nothing right now, but hang on, okay?
What happens when I go to try and have mine called a foreign currency? Are we going to see a huge replication of foreign currencies and, if so, from my point of view that probably defeats just covering it by foreign currency. What's the answer to that?
Mr. David: You bring up a very important point.
The first comment I can make on that is look at the market use of the coin. Bitcoin, as I said, transfers the equivalent of $300 million in a 24-hour period. The Larrycoin would be zero. If you believe in the Larrycoin you could make a requirement that a certain threshold has to be breached or you could make a separate category.
You do bring up a complex question. I wish I had a direct answer, or the solution, but the answer I can give right now is bitcoin is the digital currency that's in use today. I think it warrants that we look at that and regulate it and not worry about the other coins quite yet.
Senator Campbell: We only had Chevy, Ford and American automakers.
I would like for you to think about that. I think we're going to be going for a little while longer on this. I love the idea. It's a nice, simple fix, but I see some difficulties there.
Can you explain to me how we get this difference between what the price is on here and what the price is on your exchange? It's about 15 per cent difference, give or take.
Mr. David: The reason is our exchange is an exchange where buyers and sellers determine the price they want to pay. The bitcoin ATM is not an exchange, it just offers one fixed price that they determine.
Mr. Awan: Maybe I could comment on that. It's not a fixed price, so what happened in this case, it's a convenience charge. If you buy a coffee at a very high-end restaurant, you're paying a different price. You have to look at it from a different perspective. Bitcoin transactions and emails, someone gave a pretty good example of what bitcoin is, and that is the best definition I heard. Bitcoin is to money as email is to postal mail. If you look at this, right now 6 billion emails are exchanged every day. Look at how many postal exchanges there were maybe 10, 15 years ago. The founder of IBM I believe said there were three computers in the entire world, and now look at what's happening.
You have to look at bitcoin from a different perspective. Of the Ethernet cable, my co-founder said a very good thing. Right now, it's used in space for communication, not for Internet. Bitcoin as a whole has a very interesting protocol. Sending an email is free, but you pay any company to get access to Internet. Once you are on the computer, you can send thousands of emails in one hour, if you have capacity to do so. Anti-spam law doesn't prohibit you.
Mr. David: The question was a specific question. Why is the price different? You have to answer that directly.
Mr. Awan: I mentioned to you right now it's around 5 per cent.
Senator Campbell: Let me go back, since I'm asking the question. It was about 80 bucks, which is about 15 per cent. When I go to a machine, I know that unless I'm using my bank machine I will be charged 1.5 on this here and I'll be charged another on my bank end because I didn't use their machine. So my question is: Why do I end up paying 15 per cent difference to you?
Mr. Kemper: The ATM operator is not Haseeb Awan. He is the manufacturer.
Senator Campbell: We are not piling on here.
Mr. Kemper: There's another party in town who operates a brokerage. They have their own kind of buy-and-sell price, and this price is coming off of their price. The price that you're seeing on VirtEx is the market price at the current moment. This price is a different broker plus the convenience fee that is associated for using the ATM.
Senator Campbell: I think you've got a big problem in between those two prices. When I go on that machine, I would expect that what I'm being charged is what the market is at that time, not what it was five days ago. You could play this machine like crazy.
Mr. Kemper: You can only buy it at a higher price. You can't sell it at that price. The sell price is a lower price, so there is a spread on the buying and the selling.
Senator Campbell: If I buy it from the exchange and I sell it on there, I can't move it over to there.
Mr. Kemper: No, you can't. The operator would buy it from the exchange and sell it there, and that operator has to put down the money to actually purchase the machine. As a business you have to make your margin somewhere, and that is the margin, because of the convenience, otherwise you spend a week to get verified.
Senator Greene: I want to ask a few questions to build on Senator Massicotte's questions about an hour ago. These are mainly philosophical questions, I think.
It seems to me that right now you're working on convertibility issues. Those are the basic issues that you are working on, and you need to do that in order to help your businesses. Another one you're working on is to smooth out the volatility in the marketplace. I can see that's very important to your businesses.
It seems to me that the more you do that, the more you are defeating the purpose of bitcoin in the first place, which was kind of set up to be a parallel currency that had little to do with convertibility, et cetera.
The closer you come to having bitcoin act like a national currency, the further away from the purpose of bitcoin you become, which begs the question, what is the need? Why do I or why does anybody need bitcoin?
Mr. O'Brien: You're making a great point. The answer is buried in the fundamental economic benefits of a low-friction distributed peer-to-peer network. What we are talking about when we are saying reduce the volatility, add some barriers to entry on the on-ramp and off-ramp, are all intended to make it easier for people to convert from the fiat sector into the digital currency world. Once you are in the digital currency world, no matter how much we wish to try and control it, to regulate it, it is virtually impossible once you are in there with fiat to do much regulation on the transactions that go on peer-to-peer. It would be very difficult, but you do have some ability to ensure consumer protection and know your client, some of the anti-money laundering and terrorism stuff.
Although it isn't the original intent of the currency, the reality is, in order for us to gain 75 per cent of the value of this kind of a currency, we're going to have to trade some things off to make sure that society and government in general and our banking partners can in fact relate to bitcoin as a technology. These are trade-offs. It's not the perfect world, but it is a trade-off that we often have to make.
Senator Greene: All those additional things that you want will cost money and that will erode the efficiency of the use of bitcoin because consumers will ultimately have to pay those costs.
Mr. O'Brien: Absolutely. But it is such a low-friction way of doing business, the margin opportunities are so substantial that even with some of this overhead we believe — and if we believe in the wonderful world of capitalism, we can put our money in and let the market determine whether or not we're right — there's still ample opportunity to provide significant returns to the bitcoin community and the entrepreneurs in that sector, at the same time as releasing value into the economy.
You're right, it's just going to be a matter of the magnitude and how well this industry does its job in keeping the costs down.
Senator Greene: Does bitcoin, in your view, ultimately expand the money supply?
Mr. O'Brien: I'm not sure if I'm qualified to answer that question. I personally look at bitcoin as a complement to the money supply as opposed to a competitor to the money supply, but I'm not an economist who understands the details of M1 and M2, so I will resist trying to answer that question.
The Chair: Thank you very much. We have just passed 6:15, and under the rules of the Senate we must conclude this Senate Banking Committee meeting.
On behalf of all members of the committee, I would like to express to the witnesses our great appreciation for your participation today, which was most helpful in our deliberations.
(The committee adjourned.)