Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 22 - Evidence - January 28, 2015
OTTAWA, Wednesday, January 28, 2015
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:17 p.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon. Welcome to the Standing Senate Committee on Banking, Trade and Commerce. Today is our first meeting of 2015 and the thirteenth meeting in our special study on the uses of digital currency, including the potential risks, threats and advantages of these electronic forms of exchange.
To date, the committee has received presentations from a wide range of witnesses, including government agencies, digital finance experts, academics and bitcoin companies.
Today we will focus on some of the potential risks of digital currencies. Various witnesses have told the committee that digital currencies, due to their digital and sometimes anonymous nature, can run the risk of being used for nefarious purposes, including money laundering, terrorist financing and drug trafficking, just to name a few.
To help us to better understand these issues, I am pleased to welcome, from the Royal Canadian Mounted Police, Jean Cormier, Superintendent and Director, Federal Coordination Centres; and Drew Kyle, Sergeant and Acting Officer in charge, Financial Crime, Federal Policing Criminal Operations. And from the Canadian Security Intelligence Service, we have Michael Peirce, Assistant Director, Intelligence.
We will begin with opening remarks from Mr. Cormier, to be followed by Mr. Peirce.
Mr. Cormier, welcome. The floor is yours, sir.
Superintendent Jean Cormier, Director, Federal Coordination Centres, Royal Canadian Mounted Police: Thank you, sir. Good afternoon, Mr. Chair, members of the committee, colleagues, CSIS colleagues. I am accompanied here today by Sergeant Drew Kyle, whom you have introduced, the Acting Officer in charge, Financial Crime, Federal Policing Criminal Operations. Sergeant Kyle has researched the phenomenon of digital currency, and I may call on him to assist in answering some of your questions here today.
I would like to thank you for inviting us here today and allowing us the opportunity to discuss digital currencies.
[Translation]
I am aware of the testimony that has already taken place at this committee, and that you have heard from many witnesses on what digital currencies are all about and how they function. I will begin by addressing some of the concerns that you have touched upon in your previous sessions that relate specifically to the illicit use of digital currencies, which is of primary concern for Canadian law enforcement.
[English]
First, I would like to make it clear from the outset that we fully acknowledge the many benefits associated with digital currency for legitimate customers. We know that digital currency offers efficient privacy and security, advantages that are not always present when dealing with traditional fiat currencies. Digital currencies are clearly a new frontier, one in which innovation will no doubt lead to significant consumer benefits for those that use it for legitimate means.
As with any new and innovate practices, especially the ones that promise anonymity and the unregulated movement of funds, we can expect that criminals will employ and exploit these particular aspects to further their criminal activities.
[Translation]
Over the course of your committee's proceedings, you have asked virtually every witness appearing before you if they were concerned about digital currencies being used as a vehicle for illicit trade or to launder proceeds of crime or to finance terrorist activities. Some of these witnesses have expressed a level of concern, and the RCMP would also like to suggest that digital currencies represent a real and evolving threat. The RCMP is aware of the potential for digital currencies to be exploited for criminal use, and it is our view that the illicit use of digital currencies does indeed represent a threat to Canada's economic integrity.
[English]
Although these may not have occurred in Canada, there are several examples of large-scale criminal activities that were directly enabled by digital currency. Most notably online were the black marketplaces sometimes referred to as "dark net sites." These sites offer access to a wide variety of illicit criminal consumer products, including illegal drugs, firearms and online exploitation of children. Digital currencies, specifically bitcoin, with which I know you are already familiar, have become the near-exclusive payment mechanism for these illegal marketplaces.
As was previously noted by my colleague from Finance Canada, one of the sites known as Silk Road was shut down by U.S. law enforcement agencies in 2013. This site moved hundreds of millions of dollars' worth of bitcoin associated with the purchases and sale of drugs and other illegal goods. It is equally troubling that Canada was the country of origin for some of the items listed on that marketplace. In spite of law enforcement action to disrupt the site, new online criminal marketplaces emerged. For example, one variation was Silk Road 2.0, which was successfully disrupted again by international law enforcement action in November 2014. New online criminal markets will surface and require international law enforcement cooperation to counter the threat, no doubt about it.
[Translation]
In another example, operators of Liberty Reserve, a centralized digital currency exchange, are currently before U.S. courts having been charged with laundering $6 billion through 55 million illegal transactions. Law enforcement actions in 17 countries, including Canada, were involved in this investigation.
Digital currencies present a tremendous challenge for law enforcement because decentralized digital currencies such as bitcoin are not bound by the same laws or regulatory regime as other legal tender.
In essence, bitcoin is stateless and users have the ability to move their transactions to the country that offers the least resistance — and they can do all of that, through electronic means, regardless of where they find themselves on the globe. Essentially, a world-wide value transfer system.
[English]
From this standpoint, it is important for Canada to ensure that we are not viewed as the weak point in relation to digital currency systems. Canadian law enforcement continues to work with its domestic and international partners to investigate, share information and help ensure that there are appropriate legal restrictions around the use of digital currencies without negatively impacting the benefit that they offer to legitimate consumers.
We recognize that regulating digital currency systems is not the same as regulating the traditional banking sector and that it presents unique challenges. You have heard the testimony of Andreas Antonopoulos, author of Mastering Bitcoin, and agree that care must be taken to ensure that the virtual currency innovation is not suffocated by regulation. However, we know that organized crime groups in Canada and around the globe specialize in finding ways of taking advantage of areas in the economic system that offer the least amount of accountability and transparency. Regulation could assist in mitigating that level of threat.
[Translation]
Further, when it comes to money laundering and terrorist financing, the biggest concern that we have with virtual currency systems, like bitcoin, is the ease with which transfers can take place across international borders with little to no oversight. Once an individual has a bitcoin account and the financial resources to move, it is extremely easy for that individual to transfer those funds to another bitcoin user overseas for virtually any purpose.
From a law enforcement and public safety point of view, it is these transactions which concern the RCMP, and we believe a regulated system which can trace and detect such transactions would assist law enforcement and our partners who are engaged in the fight against money laundering and terrorist financing.
[English]
The Canadian government is in the process of implementing legislation that would place virtual currency markets, such as bitcoin, in the same category as money service businesses under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This means that they will be subject to the same reporting requirement as money service businesses to ensure that activities taking place within the exchange do not violate laws related to money laundering or terrorist financing. This is consistent with actions being taken by our key international partners, including the U.S., the U.K., Australia and New Zealand.
In conclusion, reform is a tool that the RCMP welcomes and that will serve to support Canadian law enforcement efforts in combatting the misuse and exportation of digital currency innovation for criminal purposes.
Again, thank you for inviting the RCMP to participate in these important proceedings. I will be happy to address any questions the committee may have.
The Chair: Thank you, Mr. Cormier. Mr. Peirce, please proceed.
Michael Peirce, Assistant Director, Intelligence, Canadian Security Intelligence Service: Good afternoon, honourable senators and colleagues from the RCMP. Thank you for the invitation to discuss digital currency and potential risks posed by this new technology to Canada's national security.
To contextualize my comments today, I would like to begin by briefly describing the mandate of the Canadian Security Intelligence Service. As you know, CSIS is mandated to investigate threats to the security of Canada as defined in the CSIS Act. Those threats include terrorism and extremism, espionage and sabotage, and foreign interference. The investigative function is complemented by our duty to advise the government to take the information that we collect to analyze it and share it with government departments and agencies.
In addition to the service's assessment function, which I will speak a little more about later in my comments, CSIS uses financial intelligence to advance its investigations of threats to the security of Canada. CSIS conducts this through its financial analysis unit, FAU, which is mandated to support operations and investigations through the provision of analyses of financial intelligence.
Financial intelligence not only supports investigations linked to terrorism but also supports those related to proliferation and espionage. The FAU also explores ways to better manage financial information, resulting in more operational leads for our investigations. It is a key role that they play. In addition to its own authorized collection, the FAU receives intelligence from partners such as FINTRAC, for example, which is authorized to proactively disclose information to CSIS that it believes is relevant to threats to the security of Canada.
Technological developments such as digital currency are clearly of interest to the service. In and of itself, new technology does not pose a direct threat to national security, but to the extent that it may be leveraged to facilitate threat-related activity, we have a responsibility to remain aware, up to date and informed about things like digital currencies.
While digital currencies and online payment systems may become a financial tool for threat actors in the future, they currently do not represent a significant cause for concern from a national-security perspective, partially because they are relatively volatile and not conducive to the kind of quick or easy use that we might see from individuals travelling for purposes of terrorism.
To date, digital currencies have not been seen to be a significant means of funding or facilitating threats to Canada's national security. We are faced with a fluid threat environment, however, and we know that terrorist networks and other threat actors are adaptable and opportunistic. Digital currencies certainly hold the potential to become a tool for threat actors in the future.
There have been media reports, for example, of ISIL, the terrorist group in Iraq, mentioning the use of bitcoins. There was a blog, for instance, that made a reference to bitcoins and encouraged their use. However, we've seen no significant adoption of bitcoins by ISIL.
Nevertheless, financial intelligence, including, to the extent applicable, digital currencies, is examined in the context of CSIS intelligence assessments. Those assessments are then disseminated to our government colleagues and other client departments. These assessments draw on all sources of intelligence, including financial intelligence. They're outward-facing and strategic in nature. They enhance the government's awareness and understanding of threats, they inform policy discussions, they support decision makers responsible for administering and enforcing Canadian law, and they identify emerging issues in the global threat landscape.
Classified CSIS threat assessments are shared widely with partners such as my colleagues from the RCMP regularly, Canada Border Services Agency, Public Safety, Finance, and FINTRAC, to name some of the departments relevant to the discussion today. The timely dissemination of our assessments is critical, as it enhances our partners' situational awareness and allows them to consider their response to any new developments or trends, including in relation to the use of new technologies, such as bitcoin, for instance.
To be clear, this is in addition to the operational cooperation we see between, for instance, the service and the RCMP, as well as provincial and foreign partners.
The service's intelligence assessment function is also integral to the conduct of our investigations. So while we produce outward-looking assessments, our analytical work is increasingly integrated with our collection and operational activities. Just as my analysts within my directorate draw on insights gained through the service's operations, the same analysts provide direct support to operations. Those core functions in the service are mutually reinforcing.
It's important to stress that CSIS is not an enforcement agency. We are not authorized to arrest individuals for fraud or terrorist financing. CSIS does, however, support its partners in their efforts to administer and enforce Canadian law.
Financial intelligence continues to grow in importance as an element in the detection and investigation of threats to Canada's national security. Investigating and piecing together the financial trail of those posing a threat to national security has become an essential step in protecting Canada and Canadians. Certainly individuals can only engage in threat-related activity to the extent that they have the means to do so.
Of course, the details of what our specialized units, such as the financial analysis unit, do and how they do it must remain classified. I'm sure you will appreciate that, so as not to jeopardize our ability to investigate threats to the security of Canada. Nevertheless, by sharing information with our partners, the service allows them to take action in accordance with their mandates.
I will leave it there, and we will be prepared to respond to questions.
The Chair: Thank you very much, gentlemen, for your opening remarks.
I'd like to start by referring back, and there are three words that have stuck in my mind in terms of our study: privacy, anonymity and traceability. We had a very interesting meeting in December where two witnesses from the same institution disagreed over whether bitcoin transactions can be completely anonymous. One said that some transactions can be completely "off the grid," as she called it, where the parties involved in the transaction are completely untraceable and undetectable.
Her colleague — again, I mention, from the same institution — said that her interpretation was a myth and that all transactions were traceable in some way or another, under various methods, and that law enforcement is in fact able to trace bitcoin transactions back to individuals. Although it may not be easy, it can be done.
We have heard many contradictory views on this subject. I would like to ask for yours, if I may.
Mr. Cormier: Certainly. I think that to be able to explain how private it is, how anonymous it is, or undetectable it is would require some technical knowledge that I don't have. Therefore, I will provide you an answer based on my knowledge of the digital currency world.
It is a fact that it can be detected. However, it is still being studied, and we still need to develop the tools to allow us to detect it as well. It is certainly a complex thing that requires many analyses, obviously, of different systems because the distribution of, for example, bitcoin is done through multiple computers located around the world, so you can imagine the difficulty in identifying the connection between the different computers and where it originated and where it ended at the recipient end. It is a very complex process.
We are working on developing the tools to allow us to do that. The reason I'm saying it is detectable is that I know that from international partners who have conducted investigation into digital currency that have seized computers. For example, in one instance that has gone to the court in Germany, the "command control computer" contained approximately 6 million pounds of bitcoin that was seized and forfeited as proceeds of crime. That is an indication that there is a way to detect where it is located and where it is coming from, but it is a complicated process.
Senator Tannas: Superintendent Cormier, you mentioned that there are countries that are leaders in developing rules and investigative techniques and so on. Who would you say are the leaders and why and what are they doing?
Mr. Cormier: That's a difficult question for me to answer. The leaders would be the countries that have had the most exposure to it. For me to name one country or another would be difficult because I simply don't have that knowledge. The RCMP working with many international partners that have a different piece of the knowledge that we need to pull together to be stronger in addressing the issues is essentially the approach that we are using.
Senator Tannas: Is there really nobody that you are learning from and saying, okay, these guys are ahead of everybody in this area?
Mr. Cormier: No, not specifically.
Senator Tannas: Fair enough. Mr. Peirce, would FINTRAC be tracking or watching transfers from bank accounts to bitcoin? That would be from cash to bitcoin. Is that something where the banks would be required to talk about suspicious transactions and that sort of thing? Would there be any requirements for the banks to be watching any conversion of funds out of a bank into bitcoin? That may be out of your expertise, and if it is, that's fine, but I wondered about that.
Also, have you seen or has anybody seen much in the way of commerce around buying weapons with bitcoin?
Mr. Peirce: First of all, let me thank you for giving me the out up front. It is certainly beyond my expertise and something that FINTRAC would be better able to speak to. I can go as far as saying that they do monitor some transactions between banks and bitcoin, but the exact nature and flow would be beyond me to comment.
In terms of arms, of course, from my mandate's perspective, I would be interested in it only to the degree that it's relevant for national security, and in that context we have not seen anything.
The Chair: Was that your concluding —
Senator Tannas: That's it.
[Translation]
Senator Massicotte: Thank you for being here. This technology is transparent and complex. We need your help to fully understand it. Mr. Cormier, it is clear so far that it is not necessary to do any research on the transfer of funds or the identification of bitcoin owners. It is not a threat to our economy and is not encouraging fraud in Canada, at present. This technology raises some concerns, but so far, the government and society in general is not too concerned. Is that right?
Mr. Cormier: Yes, that is a good description. However, we are concerned that the more this technology is used and develops, the greater the risk of it being exploited for criminal purposes.
Senator Massicotte: Mr. Peirce, given your international knowledge, you agree that this new currency is in no way a threat at present. So there is nothing to be concerned about, as a society, when it comes to this new currency?
Mr. Peirce: I completely agree.
Senator Massicotte: However, in your briefs, you both mention that this tool could one day be used for criminal purposes. Our committee is very interested in that. Clearly, this international currency is geared toward the future and represents major growth. In terms of the act that was just adopted, you mention that FINTRAC will be able to obtain information about transactions worth over $10,000 Canadian. Are there any other recommendations that the government should make regarding the regulations or the act itself? Are you satisfied with the tools that will be available to you in the next 5 or 10 years?
[English]
Mr. Peirce: I would certainly be hesitant to go with a five-year timeline. To tell you the truth, the threat environment changes rapidly. Of course, technology evolves very quickly, and the ability for individuals or organizations to take advantage of technology could change very rapidly as it becomes more accepted and more broadly available. So I think the timeline for any potential threat development is much shorter than the five-year period.
The current circumstances, we don't see any active threat activity in that regard. When we look ahead to regulation, I think that the information we've provided so far and in response to your questions will answer anything that would help you support policy development, but ultimately we'll leave the policy development to those who have expertise in policy.
[Translation]
Senator Massicotte: So far, nothing new is needed, but what might constitute a threat? What could change immediately and how? What is the most likely threat to our society?
[English]
Mr. Peirce: Let me take it to a slightly different context but one that's analogous: the use of social media. If we looked at the use of social media just a couple of years ago, we would find very limited use in terms of overseas active radicalization and recruitment of individuals in Canada to travel for the purpose of terrorism. We see that as a regular practice today. It evolved extremely rapidly, and individuals are using it.
As we see individuals come to the portable technology and determine that their current ways of operating are being exposed, they'll find other means of doing it, and I would expect that they will look to opportunities like bitcoin and determine whether those are effective. But the environment changes so rapidly that it's very difficult to say: Here's a timeline; this is what we foresee; this is how they'll do it. We didn't necessarily see that kind of timeline with the use of social media, and I think it would be beyond us to predict that.
[Translation]
Senator Massicotte: What can we do as a committee so that we can be mentally prepared? I assume this is an international criminal threat. This anonymous currency could be used for terrorist purposes or as ready cash for these organizations. If that is the case, I suppose that that is the threat, but what should we do as a country? According to you, with a little effort, we can identify the currency's owner. What other methods should we use to determine whether we have lost control? What does the future hold for us in that regard? Have other governments around the world adopted measures that are different from ours?
[English]
Mr. Peirce: I think ultimately the question will be whether, with evolution of the technology in support of bitcoin or other forms of technological money transfer, there comes a point at which we need powers to assist us to ensure that there's either documentation or an ability to pierce the veil. We're not in that situation currently, though.
[Translation]
Senator Massicotte: So you think that if the technology enables us to identify the owner, that is enough? Only new technological developments could adversely affect that, and that is what you are most concerned about. Do you agree with that statement, Mr. Cormier?
Mr. Cormier: I agree. However, in some cases, bitcoins have been used as a method of payment for criminal activities that we have been unable to detect. The complexity and duration of investigations to identify the initiators and recipients of transactions, without other tools that would help us identify them more quickly, is a problem. As my friend explained, technology is quickly evolving, and so are the criminals. This is not a system we can detect quickly. Quick identification of fraudsters is a problem and a major challenge.
Senator Massicotte: It is feasible. It is just a question of time. The solution is not in the act. So would the solution be to hire experienced individuals or acquire more powerful computers?
Mr. Cormier: No. The solution would be to implement a regulatory system similar to any banking system that carries out financial transactions. If a transaction takes place, such as a deposit in a bank account, that involves millions of dollars converted into bitcoins, the bank employee receiving these funds should be able to identify the client in question and have the client's file in hand.
Senator Massicotte: Since this is a virtual currency, on the computer, the goal of the bitcoin concept is to avoid going through the banking system. I do not understand the usefulness of bitcoin if we are to continue to have bank accounts. In this case, bitcoin's value becomes null.
Mr. Cormier: Yes, but it can be converted.
Senator Massicotte: It escapes me. I will have to think about it and come back to this question.
Senator Bellemare: I have two questions about the discussion we just had. First, could you please give us a real example of a situation where bitcoin was used for criminal purposes? I am not talking about in Canada. You said that there is not a lot here, but that there is elsewhere. Could you give us a real example using A, B and C, where A gives to B, who gives to C?
Then, Mr. Cormier, you said that there are measures being taken by foreign partners, including the United States, the United Kingdom, Australia and New Zealand to thwart the use of digital currency for criminal purposes. Could you tell us more about that?
Mr. Cormier: Would you mind if I answered in English?
Senator Bellemare: Not at all.
Mr. Cormier: Because my notes are in English.
[English]
The primary example where digital currency was used would be as observed by the Canadian Anti-Fraud Centre in a ransomware scam, where to decrypt files on victims' computers the demanded ransom payments be made in bitcoin. So that's a good example.
Since 2013, the Canadian Anti-Fraud Centre has received over 3,000 complaints involving ransomware scams. The people that do this essentially infect individual computers, and typically they're bigger computers with lots of information. People don't want to lose their data. They ask for ransom to remove the virus from their computers. Because those people are used to dealing with the digital world, the ransom money is to be paid in bitcoin. That's a good example of where it has been used.
[Translation]
Senator Bellemare: So bitcoins are sent to another account and nothing can be identified?
Mr. Cormier: No. In the case that was investigated, the individuals did not have the bitcoins to pay. At the end of the day, the virus remained in the computer and all the data was erased.
Although, in this example, the ransom was not paid, it was requested in bitcoins.
Senator Bellemare: All the data was erased, so there is no way to trace where the request originated?
You mentioned certain countries that have adopted legislation on this. What are those countries doing?
Mr. Cormier: I did not say that they had implemented legislation at present, but they are in the same position as we are and want to adopt their legislation to reduce this threat.
Senator Bellemare: So they are still doing research?
Mr. Cormier: Yes.
[English]
I don't know about intelligence.
Mr. Peirce: Yes, it's the same situation.
Senator Campbell: Thank you. To start, I should tell you that my regimental number was 27310. To put this in context of what I'm going to say, it means nothing to everybody else, but you will know it was after the horses and at the start of the cars.
I'm not trying to minimize it, but what we're really talking about is law enforcement and security catching up with technology. It's virtually impossible to get ahead of it because you're not sure where it's going to go. It's really no different than when cellphones came in. We were stymied with messaging, social media and all of this.
One question I want to ask: What would be the ongoing liaison between agencies with regard to bitcoin? I assume that CSIS and the RCMP have some sort of an ongoing liaison. Where else would we be looking from both the intelligence and the law enforcement community? This isn't going away. We obviously don't have a handle on it yet. We don't even know whether you can trace it or not. One expert says you can trace it, and another says you can't. Are we looking worldwide? What's the cutting edge on this? That's my first question.
Mr. Peirce: Maybe I'll start with a response, Senator Campbell. We do consult with other agencies around the world.
Senator Campbell: I don't need their names. I'm just trying to get some idea of whether there's a global concern about this.
Mr. Peirce: What I'd say is that I haven't heard anything from our colleagues through our consultations that differs from the assessment I gave you, which is currently that we do not see the use of bitcoin as an active vehicle, as a threat vector for us. We see the potential for its future use, but that's to be determined down the road. Certainly that's the same message we're getting back from our discussions with international partners. Domestically, we work closely with the RCMP, with FINTRAC and with the CBSA. We share our assessments with Finance and other government departments and agencies, and we're consistently on the same page in our view and our approach.
Mr. Cormier: It's essentially the same from the law enforcement perspective. Obviously, the fact that we are looking for tools and proposing that you consider the implementation of tools that would help with investigations is not to instill panic and say this is a widespread issue at this time. We believe that because we have seen cases already where bitcoin is being used — for example, ransomware, getting the ransom — it is something that is out there, that we need to be aware of and needs to be addressed. If we don't pay attention to it, it's going to proliferate and the problem will get worse. At the same time, whatever regulation would be put in place, it's not to cripple the innovation, either.
As far as cooperation with other law enforcement around the world goes, we do learn best practices from other agencies. We do communicate with our partners around the globe in relation to their experience and their exposure. We also learn as much as possible from the virtual digital currency world, and they learn from our exposure to it, as limited as it may be.
Senator Campbell: I suspect there are a lot more Silk Roads out there than we're aware of. I don't know what the answer is, and you may not either, but how do you get out in front of this thing? Under traditional investigations, I'd go undercover, I'd have snitches and there would be wiring, but that doesn't work here because it's so closed. What's the answer? How do we move forward when I assume that traditional methods will work to a point? For instance, do we have anybody trained within the force who understands bitcoin, who actually could go out there, navigate it, including the legal part? Do we have people trained in that?
Mr. Cormier: Well, I think you have seen some of the real experts who were already in front of the committee. The expertise that we have within the RCMP right now is certainly a work-in-progress. For example, when I speak to my friend Drew here, he says he knows about bitcoin but really he probably knows only about 10 per cent of what a person really should know to be considered an expert on the subject. So it is a work-in-progress.
How you get ahead of it? I will give you an example — maybe through the regulatory process, if it existed. Let's say there is a supercomputer in Canada that is utilized as a central repository to mine bitcoin. The regulation would have those registered with Finance Canada or with somebody that would oversee that.
Senator Campbell: We've heard time and time again that the problem is that they are not going to be regulated. They are not going into one computer. The whole system is set up so that it's not possible to do that. So basically we make the rules, and they simply ignore the rules. We have no expertise or any way of finding out who is ignoring these rules. That's the real problem. This certainly won't be the last thing that we see come up that is digital, but that's the difficulty we have.
The committee may want to make a recommendation that we put regulations in place. Well, that's fine, but if the people you're putting them in place for aren't going to follow them and there's no way of tracking them, it's not going to work. I have sympathy for you, believe me.
Mr. Cormier: I understand the challenge that you are explaining there. You are essentially explaining the challenge, because for any regulation, you are right, it is only as good as what people are willing to comply with, clearly, just like the legitimate banking system. There are still people out there that do transactions and do not comply with the regulations that are in place.
Senator Campbell: But they're easier to catch.
Mr. Cormier: True.
Senator Greene: I'm reassured by your testimony because I also don't want us to choke off the new technology before it has a chance to develop and before we have a chance to know what it can possibly add to our lives. I'm glad you have not been able to detect any threats, but that's on the one hand.
On the other hand, I'm worried that maybe the reason you haven't been able to detect any threats is that you haven't paid enough attention to it yet, or you don't have the right equipment and technology to do so.
Could you tell me how, if you can, you look for threats? Do you have people or a unit checking the public ledger on a regular basis to determine where the large amounts are going and to whom they're going, et cetera? Do you operate at that level of detail?
Mr. Peirce: I will take the first part of it, and I will use the foreign fighter terrorist traveller threat, because we have seen ISIL, for instance, calling for the use of bitcoin. When we actively investigate financial activity in and around travel, if we're seeing the money that supports the travel, then we have a pretty good idea that they're not using bitcoin; they're using the money that we're seeing to support that travel.
At this point in time, we're seeing the money. So we have reason to believe that, in fact, bitcoin isn't being used to any significant degree in that respect.
That's how we know our current coverage.
Senator Greene: It's a process of elimination?
Mr. Peirce: Exactly. Over time, as the technology develops, as individuals become more comfortable with it, it becomes more pervasive, if we see ourselves going dark, then we will have concerns; but right now we have a fairly good handle on the situation.
Senator Greene: With regard to my question on the public ledger, do you have people or technology at this time analyzing it and looking at it and watching movements?
Mr. Cormier: That is ongoing research. We even have bitcoins of our own for the purpose of exercise and developing expertise around it, so we do have digital wallets that we use to educate ourselves.
Obviously, it is a complicated process, and not to argue my friend's point, but from an intelligence point of view, as well as to what is going on out there, from a law enforcement perspective, certainly, we only know what we know. We get intelligence from different methods, obviously. Some are human-sourced, some are generated from other partner agencies, some are from other law enforcement agencies around the world, and from that we try to identify exactly what is coming our way, whether it is six months or a year or two down the road.
Senator Greene: Aside from the event in Germany that you mentioned earlier, are there other international examples? Or is that a one-off?
Mr. Cormier: That is one I recently became aware of. There were the other ones that were conducted by the U.S. as well that I mentioned, but I don't know that the U.S. seized anything.
Drew, would you know if in the U.S., with the reserve and the investigations they did, did they seize any assets in the U.S.?
Drew Kyle, Sergeant, Acting Officer in charge, Financial Crime, Federal Policing Criminal Operations, Royal Canadian Mounted Police: No, I don't know that. I don't have that answer for you at the moment, but it's quite possible. Again, those investigations would have started not, in all likelihood, out of the bitcoin. It would have started from, for instance, the Silk Road because of what they were trafficking in as opposed to the actual currency used.
Senator Greene: In general, do you see the use of bitcoin as an indicator of crime, other crime, or as the crime itself with respect to its use?
Mr. Cormier: No, from my perspective, from a law enforcement perspective, it is not the crime of transacting the bitcoin; it is what it is financing, typically, the activity it is financing.
Senator Greene: So it is an assistant to crime.
Mr. Cormier: Exactly. It could also be used, for example, for money laundering; that would be the closest to being implicated in the crime itself.
Senator Ringuette: I have many questions. Mr. Cormier, when you gave us the different examples in the U.S. and so forth, and I guess that the bitcoin activity was one of the currencies used for that criminal website, you indicated to us that you are working on tools. Digital currency is digital currency around the world. Do you have any partners nationally or internationally that have developed a certain technology that you could readily make available to your units in regard to bitcoin or other digital currency without reinventing the wheel, if a wheel is already in existence?
Mr. Cormier: I essentially don't have the answer to that, but I can tell you we do work with different partners: the industry that is involved in the technology, the private sector, as well as other law enforcement and government departments that all have an interest in it and are all involved in the research and how to address the issue.
I'm not sure if an actual tool exists. I would think that if an actual tool existed that we could employ, we would acquire that tool.
Senator Ringuette: But your network of law enforcement entities, are you working together to know, first of all, if one exists or if one entity is more advanced in regard to creating the necessary tool?
Mr. Cormier: Our technical operation office is certainly connected around the world, and I'm sure they are. Like I say, that's not my area of expertise, but I'm sure they are working with international partners in developing those tools and that they would be aware if there was a tool somewhere else that they could leverage.
Senator Ringuette: In regard to regulation, I can understand that as a law enforcement entity you would like to have regulation in case you accidentally happen into a situation where digital currency is being used in criminal activity. I can understand you want that.
I'm looking at FINTRAC, and the way that FINTRAC and probably CSIS get the flow of money transactions nationally and internationally because of their partners. The regulation imposes requirements on financial institutions, whether they're banks or insurance companies or payday loan entities, whatever the financial entity, to report those transactions to FINTRAC to be analyzed.
With regard to bitcoin, there is no entity, except that maybe down the road we will have bitcoin ATMs in Canada. But even then, it remains anonymous; you don't have a name. You don't have a source. I am trying to imagine what kind of regulation could be important enough to help you identify the entities, because with digital currency, it is not possible. You have a computer, and maybe you can detect a computer somewhere down the road with a certain tool, but who is using that computer?
The ledger is all over the world. You can't expect a million computers containing the bitcoin ledger to report the financial transactions to FINTRAC. I'm trying to imagine what kind of regulation would enable you to seek what you are trying to do with regard to criminal elements.
Mr. Cormier: From a law enforcement perspective, I don't think I have the answer as to exactly what regulation would help us enforce it. I'm hoping that the committee, after hearing from all the different witnesses, hearing what may exist and what may not exist, might be able to identify and recommend something as well. It would be helpful to law enforcement in that regard.
Maybe the system has gone too far already without regulation, and it is out there to try and bring it back to a system that can be monitored.
Senator Ringuette: Exactly. Is it an entity that can be regulated nationally?
Mr. Cormier: That's what I'm hoping the committee can come up with after the different witnesses you hear from.
The Chair: This whole study reminds me that, many more years ago than I would like to imagine, I had the privilege of sitting as a member of the board of directors of Canada Post. I can remember an individual came forward to present to the board a discussion about email. Nobody had ever heard of it.
In his presentation of the concept, nobody could even imagine that it could ever develop into anything. It is not unlike that state that I find myself when we start to deal with this situation. If we start off on the basis that I go back to my opening comment to you of calling this meeting to order, and I'm repeating it as much for myself as I am for you, this is a special study on the uses of digital currency, including the potential risks, threats and advantages of these electronic forms of exchange.
We have seen, in other countries — Russia, China — that it's basically illegal, can't go near it to varying degrees, we're not going to let anyone come close to this. We have had witnesses come forward and talk about how Canada could take a lead role in creating an environment where this whole concept, which will take years to develop, could find a home and be very advantageous to the country on a global basis.
I suspect when we sit down to write our report you will have the spectrum on one end of banning it, and you have the spectrum at the other end of creating as open an opportunity as there is to develop it, with regulation. There is a needle that will fluctuate between that. Where do you feel we should be going with this? Should we be creating some kind of a very friendly environment for this development — because it is taking place, we're not going to stop it — and try to facilitate the regulation that surrounds it? Or should we be leaning towards the other end, that we should be 20 years behind the cutting edge on this, let the other guys take the risk and see if we can catch up in some small way in the future? What do you feel about the whole situation?
Mr. Cormier: As I mentioned in my opening remarks, and I repeated it again, whatever regulation that is put in place should not cripple the innovations, obviously. I think innovation will happen no matter what. It is a matter of finding the right balance. I am not quite sure what that right balance is.
Mr. Peirce: I would say I'm policy-agnostic, to be frank. The point of my testimony is to advise you of the current circumstances that we see. I don't want to be seen as suggesting that we ban the Internet or that we open the floodgates to everything. That is for the policy work to be done. I am here to provide advice on the national security landscape.
The Chair: Sergeant Kyle, perhaps you might have some observations on what we have talked about so far. Is there something you would like to add?
Mr. Kyle: The only observation I would have is that I echo your comment on the email. I came into this looking at Silk Road and knew nothing about bitcoin, and you have heard from some of the best people on that topic without a doubt, as far as I'm concerned. I couldn't begin to touch what Mr. Antonopoulos knows about the subject matter. It is one of those areas developing so fast that we are trying to get a handle on what we do know.
Senator Tkachuk: We have been told by the experts here that the reason bitcoin and digital currency were developed is that they didn't trust the financial system because of what was going on in 2008. Many of them come here and say now that they want to be regulated. It seems to me that once governments start doing that, they have to realize that if they regulate it, they have to recognize it as some kind of currency and back it, otherwise what are they regulating? It would be like regulating mint products.
It's not something that is easily done. I haven't seen from any testimony yet, and I would like your comments on it, if there are transactions in bitcoins, in the end they need cash. You have to pay people in the illegal business. You pay people all the way down the system. They have people that are distributors for their product. The distributors, the salesmen and all those people have to be paid. They're not going to accept bitcoin. They're only going to accept cash. Sooner or later, you catch the person because they need the cash to keep in business. They need backed cash.
Am I understating that? I don't know if I am or not because I don't see this as being as big a problem as people make it out to be at the moment.
Mr. Cormier: I will ask my friend Drew to answer.
Mr. Kyle: I would agree with you that in today's world that is the case. That is what Mr. Cormier was expressing where it comes back to the banks, eventually going in with currency. However, you don't have to go far on the Internet to find that there's a great deal of lifestyle and life that can be lived on bitcoin now, from coffee shops in Vancouver to home purchases. Season tickets for NBA basketball teams can be purchased with bitcoin. I use those as examples simply because this technology is a couple of years old — maybe three, four, five years old — and yet already there's a significant amount of product, for lack of a better word, that can be purchased.
If I'm working in that world, for instance, I run Silk Road, maybe I don't need fiat currency. Maybe most of what I do in my life I can deal with through a bitcoin currency.
As more and more acceptance comes, every day you can see more and more items that you can purchase with bitcoins, straight-up purchase at different places. Is it more difficult? Absolutely. But I think you will find that in Vancouver now you can quite easily use bitcoin to purchase coffee at a number of different coffee houses, as an example.
Senator Tkachuk: I kind of understand that, but if you are doing big transactions in drugs or guns and stuff like that? I'm not sure if there's a lot of bitcoin market in Saudi Arabia for Starbucks coffee shops. You know what I'm saying?
Mr. Kyle: Yes.
Senator Tkachuk: For all the people involved, it's a very small section of the market.
Mr. Cormier: Maybe to add to your question in relation to the conversion, it is like the money-laundering process. If I want to transact money and I'm doing money laundering, whether in bitcoin or in real currency, I will probably go to an area where there's more lax banking regulation and where I can transact my bitcoin into —
Senator Tkachuk: Those are the big problems. Bad banks.
Mr. Cormier: Those may not necessarily be in Canada, either.
Senator Tkachuk: Right.
Mr. Cormier: Maybe in some of the offshore banking, so to speak, as we call it.
Senator Tkachuk: I will ask that last question. If we regulate bitcoin, that means we recognize bitcoin as currency of some sort. Right? Once it is regulated, then it loses its cachet as an easier illegal currency. They will just invent a new one. It will be another currency, as there is right now. We have been told there's up to 500, so it would just be another currency that will be used, again with all the same little problems that bitcoin has had. I don't know how you keep ahead of the game, is what I'm trying to say.
Mr. Cormier: It is a challenge. If it's regulated, if a regulation is put in place, it should cover all sorts of digital currencies, not only bitcoin. We often use bitcoin as the most common one. It is like calling a box of Kleenex "Kleenex" when they're tissues, because we go by the name brand. Certainly the regulation would not be only for bitcoin, but for all sorts of digital currencies.
The Chair: That concludes round one. I have one senator in round two to start questions.
Senator Massicotte: This is a stupid question. Earlier you gave us quite a bit of comfort that we don't have an issue in Canada. At the same time, you acknowledged that you only know what you know, and you made a reference that we probably only know 10 per cent. I felt comforted by your earlier statement. Now I'm nervous again about the whole issue because you could be very much wrong. There's 90 per cent you don't know.
Maybe give me a comment. How aware are you as an organization of bitcoin? How informed are you? You said you transact yourself. Do you have a wallet? Do you actually buy coffee with your bitcoin and so on?
Mr. Cormier: Not myself. I just want to go back, because the 10 per cent that I made reference to earlier was in relation to Drew's knowledge of bitcoin.
Senator Massicotte: So he's the expert?
Mr. Cormier: He's the expert.
Senator Massicotte: The "X" is on his forehead. If we screw up, it is his fault, right?
Mr. Cormier: That's it, yes. I'm looking at my friend Drew. No. No, the fact of the matter is it was in relation to his expertise where he was saying that he feels he knows only 10 per cent of what's really out there.
Senator Massicotte: He's the expert.
Mr. Cormier: He certainly is the one who has researched it more than I have.
Senator Massicotte: He knows 10 per cent, and he's the one who knows the most.
Mr. Cormier: No. He knows 10 per cent, but he may not be the one who knows the most in the RCMP.
Senator Massicotte: I'm getting more and more nervous.
Mr. Cormier: We also have our technical operation folks who research the technical side of it on a regular, ongoing basis.
Senator Massicotte: Do you have a wallet? Do you do transactions in bitcoin? Do you buy your coffee and your car using bitcoin?
Mr. Kyle: I do not. I have people I'm aware of who are doing that on my behalf at the moment.
Senator Massicotte: So you're not the expert. Other people are experts. Is that right?
Mr. Kyle: They're physically using it, yes, and reporting back so that I can do what I refer to as a proof to show where we can and can't leverage it, what it can and cannot do.
Senator Massicotte: Have you tried going on the black market and using —
Mr. Kyle: I'm not at that point, no.
Senator Massicotte: Have your fellows who have the wallets tried to buy illicit goods, and so on?
Mr. Kyle: I couldn't speak to that. I'm by far not the expert on it. We have technological people, as Mr. Cormier said, who have far surpassed me as far as the use of it is concerned. I can speak to it from an operational use in investigations, where it has been used and where it hasn't, that sort of thing, and how much we're seeing of that. That's what I can speak to.
We are working towards trying to get a greater handle on it. I can tell you that there are people who have purchased bitcoin who are holding it and moving it around in my benefit so that I can figure it out.
Senator Massicotte: You realize we have met some of these experts. You realize these are usually young fellows.
Mr. Kyle: Absolutely.
Senator Massicotte: Younger than us. They're pretty sharp. They are at the forefront of technology. Boy, it is a race, effectively.
Mr. Kyle: Yes.
Senator Massicotte: I suspect you are losing the race at this point. Maybe before we get comfortable we should hurry and catch up. They're really, really ahead of the curve.
Mr. Cormier: That is a good statement. You are right that from a law enforcement perspective, we know the technology is already out there, and now we have to catch up with it, definitely.
I just wanted to clarify one point as well. I do not personally have a digital wallet. When I said that we have digital wallets, I was referring to the RCMP.
Senator Massicotte: Mr. Peirce, do you have a wallet?
Mr. Peirce: I don't have a wallet. I thought about going down to the clock tower —
Senator Massicotte: Before this meeting?
Mr. Peirce: Exactly. This is one of the issues around bitcoin.
Senator Massicotte: Check it out. Maybe that's where the problems are.
Mr. Peirce: I understand him to be of very good character.
The RCMP and the police forces have a more challenging brief in many respects in regard to keeping up with the technology because of the many different means that can be used to conduct criminal activity. From the national security context, we have very clear threat vectors that we follow, and I can say we have a number of very talented young people, just as the RCMP does, who are very impressive on this subject. I can say with some confidence that we do know what we're seeing and we know what we're not seeing in regard to the use of bitcoin in support of, for instance, terrorist activity. Because it is a more contained field, we're able to say we're following these targets and we're seeing their activities. We see how they travel. We see who has used currency. By the way, money — cold, hard cash — is the most secure form of currency right now and the hardest to trace.
Senator Massicotte: It is anonymous.
Mr. Peirce: No question. So we see when that is being used, and we have some comfort in saying this is the degree of problem that exists, and right now it is very limited in the national security field. What I can't tell you is what it will be, what's the future of email and what's the future of bitcoin. I don't know the answer to that.
The Chair: Gentlemen, you have been very helpful in your comments. You have been very candid with your answers. Are there any questions you would have liked us to have asked you that we didn't, or any comments you would like to make to the committee about what we might consider in our future deliberations and report? Are there any points you would like to make to us, particularly?
Mr. Peirce: The one point I would come back to and emphasize is a point that Superintendent Cormier made. In terms of investigating, the biggest challenge is the speed. You may have a lead and you want to investigate it. By the time you get the information necessary to support the investigation into the use of a digital currency, it may be too late. And that's where the challenge will lie in the future as well.
Senator Massicotte: What does that mean? Does that mean you want our report to propose you buy a bigger computer? Is that what you want?
Senator Campbell: Easier access to be able to get information.
Mr. Peirce: Faster information is the key. That's not a comment about any particular type or kind of regulation. That's the challenge that will lie ahead.
The Chair: Gentlemen, on behalf of every member of the committee, I'd like to express our great appreciation for your appearance today. You have been very helpful in our deliberations. We will continue on.
Thank you to the committee. This meeting is concluded.
(The committee adjourned.)