Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 21 - Evidence - December 10, 2014
OTTAWA, Wednesday, December 10, 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 and welcome to the Standing Senate Committee on Banking, Trade and Commerce. Today, as hard as it is to believe, is our final meeting of 2014 and the twelfth meeting in our study on the uses of digital currency, including the potential risks, threats and advantages of these electronic forms of exchange.
Still in the concept stage, the committee has received presentations from the Department of Finance, the Bank of Canada, the Canada Revenue Agency and the Canadian Payments Association. We have heard testimony from academics in the fields of economic and monetary history and cryptography. The committee has also received presentations from a number of bitcoin companies and the bitcoin guru Andreas Antonopoulos.
Today I am pleased to welcome, from the Dominion Bitcoin Mining Company, Jason Dearborn, chairman. A former member of the Legislative Assembly of Saskatchewan, Mr. Dearborn's company is in the business of bitcoin mining and has a strategic partnership with CoinCad of Toronto, who are experts in cybercryptology and wallet security. As we have learned, bitcoin mining is the process which creates bitcoins, but I will not go further into detail about how it works as I'm certain Mr. Dearborn will be able to explain it far better than I can.
I'm also pleased to welcome, from the Digital Finance Institute, Manie Eagar, co-founder and chair; and Christine Duhaime, co-founder and executive director. The Digital Finance Institute is a not-for-profit organization based out of Vancouver, British Columbia. They represent a strategic link in digital finance between industry, academia, financial regulators and policy-makers. Their areas of interest include the development of digital finance technology and commerce, digital finance regulation and financial inclusion.
We will begin with an opening statement from Mr. Dearborn, to be followed by Mr. Eagar and Ms. Duhaime.
Mr. Dearborn, the floor is yours, sir.
Jason Dearborn, Chair, Dominion Bitcoin Mining Company: Honourable members of the committee, I would like to thank you for your insight in looking into the important issue of crypto-currencies and, in particular, bitcoin. Today I will focus on the regulatory framework of bitcoin in Canada, where it is, where it's going and why. I believe I'm uniquely suited to comment upon this, as I am in the industry as well as a former two-term legislator.
The block chain technology is a disruptive technology. The recent Bank of England report on crypto-currencies recognizes that this technology could be ''a game changer.'' While this is true, the transition period of new technology adapting into regulatory frameworks not designed for them are in themselves disruptive.
I chair the board of the Dominion Bitcoin Mining Company. Our business is to allow an avenue for accredited investors to place monies into the bitcoin industry. This is done through mining and, finally, distribution of proceeds through secure wallets with our partners, CoinCad.
Our first course of action was to hire a securities lawyer. We have yet to take money from any investors, nor to approach any, as we were first hit with a cease trade order by the Saskatchewan Financial and Consumer Affairs Authority, which has lapsed, to quote the investigator, ''because you had the name Bitcoin in your company.'' I invite you all to review the evidence for yourselves when we post it all on Facebook. We have yet to get any kind of disclosure.
This example is demonstrative of how changing technologies can crash up against anachronistic regulatory frameworks. When you get bureaucratic turf protection, it increases temporarily the transition.
As of today, the Canada Revenue Agency has made rulings on bitcoins, saying that they are eligible for tax of capital gains when they're converted back into Canadian dollars. This is unfortunately an extremely poor policy and short-sighted, in my view, for if one is eligible for capital gains taxes, then seemingly they are also eligible for capital losses. With the fact that bitcoin wallets are held anonymously but that the block chain ledger is public domain, it would be easy to transfer bitcoin at a loss to oneself into a new wallet.
The Government of Canada would be wise to come up with policies that interface with the technology rather than trying to adapt a system that is simply at cross-purposes with it. Further, there are no avenues at this point to put bitcoin earnings into Tax Free Savings Accounts, RRSPs, universal life tax deferrals, shelters, et cetera.
The Dominion Bitcoin Mining Company is partnered with a Toronto company of MIT graduates called CoinCad who specialize in wallet security. It is through the technology itself that the government could become active in a meaningful policy and lucrative for taxation revenues. The CoinCad wallets utilize a 256-bit encryption, and this is more than twice as powerful as the standard 126-bit encryption utilized by Canada's banks for online banking today.
My policy suggestion going forward with regard to bitcoin is that the Government of Canada sanctions or endorses certain wallets. These would have super high encryption protocols, and in return for this, the wallets would have a built-in Tobin tax or transaction fee coded into their essence. My suggestion would be a rate of one quarter of 1 per cent per transaction. This revenue would then flow to wallets owned by the Government of Canada. With this method, every time the bitcoins were utilized, a tiny fraction would be sent to the wallets of the Government of Canada. Initially these deposits could be utilized in a program akin to deposit insurance. Hence, in the event that an individual had their government sanctioned wallet hacked, they could make application to the insurance fund for bitcoins relative to what the regulations would deem feasible, say equivalent to insurance deposits on savings accounts. Such a system would aid in the adoption of bitcoin throughout Canada but also provide the basis model globally for the necessary interaction between bitcoin and government.
There are 5 billion cellular phones on the planet today. By the end of 2016, this number will have doubled and virtually every person globally will be connected. It is the vast populations of the Third World that I believe will push bitcoin into absolute prominence as there is less risk of a Liberian with a smartphone holding her wealth in the cloud in a depreciating non-fiat currency than owning currency that can inflate at 300 per cent annually.
Further, the countries that have recently undergone democratic revolutions, from the Arab Spring to the Ukraine to the ongoing Umbrella Revolution in Hong Kong, have utilized technology to precipitate the changes they want in governments. These societies, however, lack the appropriate civil institutions to do little more than put in the B team after the dictator is disposed. Look at post-Mubarak Egypt as an example. Adoption of bitcoin by the protesters relieves the state of one of its traditional monopolies — tax or money — and leaves the state only with the monopoly on violence. These are realities I'm reporting on, not positing, as these events are already occurring in these countries.
As a trading nation, Canada has a huge amount to gain from bitcoin as currently, unless we are trading with our American partners, we are forced to switch our contracts into the world reserve currency. I have a case study in my written submission that demonstrates how we have up to 3 per cent to gain on our exports' bottom line utilizing these technologies.
I thank the committee very much for having me in front of them and I'd welcome all questions this afternoon. That concludes the time I was allotted, sir.
The Chair: Thank you very much, Mr. Dearborn.
Manie Eagar, Co-founder and Chairman, Digital Finance Institute: Thank you, honourable senators, for the opportunity to address you. I'll try to keep it short and we can pick up on the question and answer session.
To quickly set the stage for the Digital Finance Institute, we travel widely and engage with bodies from around the world. From my accent, you can hear that I'm originally from South Africa. I am about to become a citizen of Canada, and proudly so.
We get input from major players from the World Bank to the IMF, to parties that we are in discussions with like the Gates Foundation. You are probably aware of Bill Gates' statement in support of crypto-currencies or new instruments to help reach the so-called unbanked and to provide more inclusive efforts and technologies to bring services that we take for granted to other parties and members of the global community worldwide.
In Canada itself, the experience is that if you're an immigrant, which I can speak to from experience, you basically push the restart button as far as your banking and other services are concerned, and you start building up credibility from scratch. So I know very well what bitcoin is going through. It is the new kid on the block, new technologies that are emerging as we speak, trying to find their way and prove its value and worth without unnecessary risk out there in the market space.
From Digital Finance Institute's perspective, there are three pillars on which any decision making, policy making and development in this space should rest. Number one is innovation. You must have read the newspaper headlines that everybody from London to New York to Dublin to the Isle of Man to the Cayman Islands — I can keep mentioning them — in the recent few weeks proclaimed themselves a safe haven for investments and opportunities in the digital finance space. We'd like to see Canada on that list as well, if it isn't already.
The key drivers would include innovation. I think we're known for innovation. The digital finance space in the next few years is going to be quite exciting and probably dramatic in the way in which technologies are starting to converge, and solutions like the crypto-currency, the block chain solutions that you've heard about, can really prove their worth.
Support globally is growing for digital finance ecosystems, start-ups, entrepreneurs and investor communities that are integrating distributed digital banking, mobile transactions and crypto-currency solutions and delivery platforms. It is no mean task. If you've dealt with SWIFT or interbank exchange, there are a lot of platforms and protocols that you have to work through. There is participation in emerging digital economy market areas such as social and environmentally motivated initiatives, diaspora remittances — a huge factor for communities living in Canada from other countries — and other sectors.
My colleague will spend a bit more time on the transparency side, but transparent processes lead to trust and increase the bandwidth of value exchange. As with digital marketplaces that constitute the share economy, success hinges not simply on providing a service but on the quality of the experience and, most importantly, whether it is affordable, secure and accessible.
There needs to be broader involvement and greater development of international collaborations and initiatives for standardized and balanced regulation over digital payments and remittances, and emerging technology issues, and the monitoring of regulatory performance and reform for effective consumer investment protection in digital finance, especially if we want to apply these inventions and solutions universally.
Inclusion is a very real issue. Financial inclusion is a key driver of a future sustainable global society with fair and equitable access to resources, wealth, value exchange and affordable and relevant financial services. The availability of banking and payment services to the entire population without discrimination should be the prime objective of any financial inclusion public policy.
The development of innovative solutions is required to solve the problem of financial inclusion to support sustainable economic growth and to advocate for greater participation of women, especially for excluded communities in financial technology and the digital economy.
On that note, the vast majority of users — in some countries up to 98 per cent, according to a recent World Bank report — of the so-called unbanked and underserved markets are women. These are women who look after the household income, who pay for their kids' schooling, who are street vendors or run their open markets in a variety of environments. We regard them as a key target market for financial inclusion and digital finance literacy programs, which we already have versions of out there.
In this regard, the last point is useful to refer to the success of m-pesa. I don't know if the committee has heard of m- pesa. You might have. M-pesa in Kenya shows the potential for new financial technologies to reach large markets and mass audiences across jurisdictions. M-pesa, in short, converts mobile phone airtime tokens designated in the local currency for value inter-exchange. Today, a quarter of the $44 billion economy in Kenya runs through m-pesa, through a mobile phone device, and 79,000 people who might otherwise have been jobless have been given opportunities to work as m-pesa agents.
It is not coincidental that Canada's own Rogers mobile service provider has acquired a banking licence and recently opened its Rogers Bank online, offering credit card services, a rewards scheme and other benefits for a start.
You are going to hear a lot about the whole tokenization component. I wrote an article that appeared yesterday through the Apple Pay invention, if you want to call it that, which you'll see a lot about next year. Bitcoin, at the end of the day, is a token running on the so-called bitcoin block chain and other solutions.
Crypto-currency innovations for us further opened up a range of applications and potential solutions for an increasingly globalized economy that invites further exploration. Emerging digital finance models and technologies for financial inclusion can positively impact those who are unbanked or excluded and create greater access, equality and efficiencies in established markets.
In short, we are seeing or witnessing three areas of technology starting to converge that will provide a nice ''head scratch'' for any regulatory or policy-making body. One is digital banking or branchless banking as we call it; another is mobile commerce, payments through mobile devices and anything that's connected to the Internet; and last, but not least, is crypto-currency. Where these three territories or technologies, if you wish, overlap, you can imagine, as you've heard through past presentations, that we are crossing over so many boundaries of past legislation, new regulation and global commerce that it's going to be interesting to see how this evolves.
Opportunities for Canada: Our purpose as an institute is to develop a better understanding of the evolving area of digital finance and to provide leadership in digital finance in the commercial, public and social sectors. Specifically, the digital market, which already constitutes $4 trillion in trade globally, is projected to triple over the next decade and will touch all of us. It will touch all our devices and it's going to touch multiple jurisdictions in any average transaction.
Digitization of the financial sector is transformative because it reduces costs of services and distribution and creates purely digital financial products and services, some of which are entirely new and others which may not be new but are delivered on international digital platforms that are new.
These technological changes create significant opportunities for new financial technology for Canada and many new opportunities for governments and companies to drive growth and innovation, opening the door to greater participation for entrepreneurs.
These changes put pressure on governments to consider how their economies could participate and how they can and should enable participation through the right business environment and regulation, and ways in which they can capitalize on the global shift to digital finance. There will need to be new investments and focused policies to embrace the increasing digitization of finance and the consideration of a wide range of untested issues.
Currently, there are no global regulatory regimes or regulatory infrastructures that address digital finance, including how machine-to-machine digital financial transactions will be regulated in the ''Internet of Things'' world. Canada has an opportunity to step up in and take a leadership role in this area.
Christine Duhaime, Co-founder and Executive Director, Digital Finance Institute: We're grateful for the opportunity to be here. Thank you for the opportunity to provide input to your study on digital currencies.
My comments today will merge the conversations we've heard earlier today and talk essentially about the financial crime risks of digital currencies to the extent we know about them and talk about some solutions and regulatory issues and how we might look at regulation down the line with respect to digital currencies. Then we'll talk a bit about financial inclusion and de-risking and job preservation in Canada.
As you know, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act is the legislation that governs anti-money laundering and counter-terrorist financing in Canada. Two of the most important goals of that legislation are, first, to protect the integrity of the financial system. We do that by leveraging banks in that mix and we ask them to identify customers and take on that role for us. We report those financial transactions, as you know. The second is to protect national security purposes, and that's where the counter-terrorist financing issues relate.
Indeed, as we know from recent events, the threats we face in Canada are quite serious and include growing threats in Vancouver. We heard from the RCMP last week in the counterterrorism session we had that there were growing and significant threats from transnational criminal organizations. As we saw in Ottawa recently, there are threats of terrorism right here in our own backyard. Our counter-terrorism and anti-money laundering laws help us to identify those types of threats and protect us to ensure that these issues don't recur.
The counterterrorism and anti-money laundering regime pursuant to the Financial Action Task Force recommendations in 2012 was redesigned to be purely a risk-based approach. That change was made to look at a number of considerations.
First, banks were being fined significantly and were over-complying with the regulations by having one-size-fits-all type regulation.
Second, there were issues with respect to financial inclusion, where the more we regulate the financial services industry, the more we create a financial inclusion problem. Only a certain number of people in the world are banked, unbanked or excluded or included. The FATF in recognition of the fact that our counter-terrorism and anti-money laundering laws were not supposed to create a financial inclusion problem rejigged the system so that on a national and individual financial institutional level, we would look at regulation and make sure that we accommodated financial inclusion at the same time.
The strategy in 2012 from the FATF was that the federal government would undertake a national risk assessment of its sectors, i.e., including digital currency, although that didn't exist at the time but is relevant here. They would take a national risk assessment and they would undertake that risk assessment with the private sector as well. They would go to the banks or whatever it happened to be and get some input and create a risk assessment per activity. From that risk assessment, the reporting entities, for example the casino industry, would take the federal government's risk assessment and prepare its individual risk assessments based on its location or on its specific activity.
As far as I can tell as a financial regulatory lawyer, we've never seen national risk assessments of any particular sector, particularly not in the casino industry, which I work a lot in; and we haven't seen it in the digital currency industry. What has happened, though, is that reporting entities undertake their own risk assessments based on their own reviews of what they perceive to be risks. Instead of the risks coming from the top down, they seem to be coming from the bottom up, which is a reversal of the way the system is supposed to work.
One issue that has arisen with respect to Bill C-31, which will regulate the bitcoin industry and digital currencies and make them a money services business, MSB, and therefore a reporting entity under the financial crime regulation and require them to undertake identification of clients and report to FINTRAC, is that the dialogue that was supposed to occur with respect to the risk assessment on the national level appears not to have occurred. There was no reach-out to the digital currency sector to assess these risks. As far as we can tell, there is no national paper that we've ever been privy too. We have regulation coming down under Bill C-31 — I understand the regulations are somewhat delayed but apparently coming — that will govern digital currencies without this dialogue having taken place. One of our suggestions is to have that dialogue, to go back a step and make sure we have this national risk assessment on whether or not there are financial crime risks with digital currencies.
I wanted to talk briefly about one of the questions I always get asked about, which is whether or not there are terrorist financing risks with respect to digital currencies. That's an interesting question. As we heard from testimony earlier, bitcoin has the capacity to be quite anonymous. In fact, I own a wallet that I set up completely anonymously, but there are wallet services that are not anonymous. So what you have in the space is a system whereby people have undertaken voluntary compliance with anti-money laundering laws, and people have set up wallets that are not anonymous. Then you have another group of people — me as a test — who set up wallets that are completely anonymous.
My example of telling you about the wallets that are completely anonymous is that I could, while in this room, transfer bitcoin to the head of the Islamic State using my cellphone, if I so chose and if he had a bitcoin wallet, and nobody would ever be the wiser. That would be an unreported transaction. If I was an ISIS sympathizer, I could transfer $10 million in three minutes.
Not only would that transaction not be recorded or reported or known from my end because I have an anonymous wallet, but if a terrorist organization at the other end had an anonymous wallet, it would be a purely anonymous transaction.
Having said that, though, the U.S. Treasury has said there is no evidence that bitcoin is used significantly for terrorist financing, and I've never heard them say it has been used at all. I don't want to put the fear of death into anybody about there being terrorist financing risks. It is a risk, but we just don't have any evidence it's ever happened.
There are other risks as well because bitcoin is anonymous. As I have heard from people who do work in China, one of the more favoured ways to accept bribes is to accept a bribe in bitcoin. If you want to move assets out of the country or if you want to avoid currency restrictions, if you have a wallet in China, it's a pretty good, fast and non-transparent way to move money out of the country. That's just anecdotal evidence; it is not pursuant to any specific or authorized study with respect to bitcoin.
One of the issues as well with respect to bitcoin, talking about the tax issue that was brought up earlier, in some ways, bitcoin is better than a Swiss bank account because you could transfer bitcoin to the Cayman Islands and CRA would never know you had it. They would never know you had mined it, if you happened to have mined it, or if you acquired it through an anonymous wallet, and you can live happily ever after never having paid taxes.
Now, again, there is no evidence that has ever happened, but when we talk about some of the financial crime risks that might occur with something like bitcoin and other digital currencies, those are theoretical risks. The reason I bring them up today is because those are the types of issues that I think would be really helpful to have in a dialogue when we talk about a national risk assessment. Those are the types of things I think we need to talk about. We need to discuss whether or not it occurs, has occurred, will occur, what those risks are and then from that conversation, we do what the FATF said we should be doing, which is a national risk assessment. From that national risk assessment, our banks can formulate a decision on whether or not they wish to bank things like bitcoin businesses.
The Chair: Two minutes to conclude, please.
Ms. Duhaime: Sure. I'll move on to financial inclusion and de-risking. Those are two concepts that arise out of anti- money laundering law.
I explained earlier that financial inclusion happens when the more you regulate the financial industry and require I.D. and transactions to be reported, the more you have people that leave the system. Either the banks are kicking them out, which is called de-risking because they're too risky to have, or people are leaving voluntarily, so they're falling into this area of financially excluded. That's not good for terrorism. That's not good for anti-money laundering law. That's not good for counter-terrorist financing.
The reason it's not good is that our whole anti-money laundering regime was set up so that we would have the most amount of transactions that we could monitor, because it's a volume-based system. As we over-regulate and move people out, we are creating more of a risk for ourselves in the sense that those transactions are not being monitored or reported, and they are going to the underground banking economy, which is not good for us.
I'll wrap up on that front by saying that if we were to look at the regulation of bitcoin in a balanced way, keeping in mind the fact that we do not want to create more of a financial inclusion problem and we want to bring these people back into the banking system and go to the banks and say, ''Look, there's no evidence that bitcoin is necessarily all that problematic, quit de-risking them,'' then what happens is we bring people back into the anti-money laundering and counter-terrorist regime and we can monitor those transactions for the safety of all of us.
On the de-risking point, some of the exchanges in Vancouver have been unable to get bank accounts. There is one small bank in Calgary that will bank them for a whopping fee of $7,500 a month, which is quite horrendous. They have the choice as to whether or not they would bank with this small bank that will take them despite the risks, or they move to underground banking.
The Chair: Ms. Duhaime, I'll have to thank you and turn it over to senators for questions.
Ms. Duhaime: Thank you.
The Chair: Before I do, I want to indicate to our committee that the written presentations were provided in English only to the clerk just a moment before our committee started, and I want to assure the committee that they will all be translated and circulated to members.
I'd like to go to Mr. Dearborn first. You said, ''This example is demonstrative of how changing technologies can crash up against anachronistic regulatory frameworks.''
Mr. Eagar, I believe you also talked about the need for global regulatory regimes. One of the things we are facing at this committee is the whole question of regulations. We have had those in front of us that say that any regulations will stifle the growth of this digital area.
May I take it that you are both proponents for regulations?
Mr. Dearborn: Yes.
If I may comment, sir, I'm an older member of the bitcoin community by age. I'm 42. Most of the people involved with this are in their twenties. It comes out of the hacker culture. These are computer coders, and there's a very strong libertarian strain that runs throughout it. When it started during the post-financial crisis of 2008-09, the idea was ''no government,'' that we're just all going to be free and on our own.
No one particularly likes paying taxes, but I do enjoy roads and a hospital for grandma and a school for the kids. That's why I think democracies are really well framed to be able to put regulatory regimes in place that make sense and are working with the technology. That's where I think Canada can have a leadership role.
There are about 43 million wallets globally right now. Nobody knows who owns them or how many bitcoins are in any of them. I think that for the uptake to be used in consumer society, people of my mother's and father's generation — they have smartphones and whatnot — are going to be a lot more comfortable if they know that it's regulated, that there's a little Maple Leaf on it that says ''This is a Canadian-sanctioned bitcoin wallet.''
The Chair: I'm going to accept that as your response.
Mr. Eagar, is there anything you would like to add with regard to regulation?
Mr. Eagar: This question comes up everywhere all the time. I'm a mentor in Startup Canada. Every young start-up wants to do this bitcoin thing because they see the opportunity, and obviously everyone wants to be the next Facebook or Twitter or whatever. My response is very simple.
Obviously we're dealing with something completely new on the one side, for which it's very difficult to regulate unless we get our definitions right. I'm going to quote from Mr. Lawsky shortly, who gave the opening address at Money 20/20 a few weeks ago, which I attended.
To come back to my response, if you run a business and it has got bitcoin somewhere in it, you fall under the normal regime of the day with its rules of law. If you incorporate it or you are trading, you have to comply with all those things. You need to know your customer. You need to fill in all the right forms. You need to declare taxes. The mere fact that you're doing bitcoin does not exclude you from that, and people accept that.
I've never met anybody who said, ''No, we want to break the law.'' Let me assure you. The question is: Isn't there enough already under which we comply and report to give people, especially the banks, a comfort level?
A banker at Money 20/20 said, ''At the end of the day, we're in the business for risk and reward; too much risk, too little reward, and vice versa.'' Obviously we need to cross that bridge and come to a common understanding, and I'm sure you've thought about that as well.
I give people an interesting response. I don't know who it came from, but if you're a farmer and you have two sheep this year and they make two more sheep in the following year, you as the farmer have a responsibility to declare this capital gain or asset acquisition that you've had for which you are taxed. Think about bitcoin in the same fashion. I know it sounds platitudinous, but that is the gist of what we're dealing with here. The fact that people can then also transact and send their sheep offshore obviously raises other issues, but we have rules under which we should be able to comply.
On the other side, we need to invent new stuff, but I'll leave it at that.
[Translation]
Senator Bellemare: My first question is for Mr. Dearborn. If I understood correctly, you are proposing an insurance system that would cost 0.25 per cent of a bitcoin per transaction. Could you clearly explain the risk that such an insurance system would cover?
[English]
Mr. Dearborn: The concept is a Tobin tax, which I'm sure members of the committee have heard of. A wallet has two parts to it. There's the bitcoin encryption, which is the non-fiat monetary value inside of it, and the second part is the personal password. We've seen many of these personal passwords hacked and the coins removed to someone else.
In the block chain ledger, however, they know where they've gone, but they just don't really know where it is. You know that it's gone to another wallet; that's all proven.
I am referring to the security that would be around the wallet. If it was a registered wallet and I had three bitcoins in it — there are a thousand Canadians using this every day and they're making a deposit — and my wallet gets hacked, I apply to the Government of Canada and say, ''I lost my three bitcoins.'' Seemingly, the government would have received that Tobin tax from the thousand wallets and said, ''Yes, you did. You've proven your case. You've shown us on the block chain, indeed. Here are your three bitcoins back,'' or whatever is appropriate and considerate. It's my belief that the cryptology used for the security can be strong enough that they won't be hacked at this point. I'm not the expert at this, but our MIT graduate partners have explained it to me this way.
The current cybersecurity around the banking industry in Canada would leave a hacker with a position of an hour and twenty minutes to push through all of the security measures before they morph, and they can't get in. This 256-bit cryptology would shorten that time period down to between two and a half and seven seconds. In the event that the government would start such a program, initially it could be used for an insurance deposit-like scheme, but over time, if the adaption increases, this becomes a source of revenue. There is reason to believe that it will be adapted.
From the consumer point of view, I have friends that run a restaurant, and they do about $3 million a year. It's a very good place to eat. The transaction fees for their credit cards are approximately $60,000 annually. The transaction fees if those were in bitcoin would be zero, so the market will move toward this.
I'd like the committee to think of it this way. I believe that bitcoin and the crypto-currencies today are where email was in 1993. It shares a lot of the same characteristics. It's simple, free and frictionless.
Did that answer your question?
Senator Bellemare: Yes. I'll have to think about it, but it's the individual who will be insured.
[Translation]
You are saying that having this kind of insurance system in place would deter fraud, but I do not understand how it would shorten the amount of time that a hacker has to steal the money.
[English]
Mr. Dearborn: That is just what the tool will potentially produce.
From my perspective, the main interest in this is to have a sound policy from the government congruent with the technology, because the technology is going to move at a pace usually quite a bit quicker than the government moves. Secondly, having the stamp of the Government of Canada on this would vastly increase its usage because people would come to trust it, that the government is involved.
Right now, if you phone up your Sun Life mutual fund broker and say, ''I want to invest in bitcoin,'' they'll say, ''Oh, you can't do it,'' and you can't. Or it's all criminals and drug money and this, that and the other thing. That's common, and we want to overcome that as the industry as a whole. That's why I think it's important to be working and appreciate the importance that this committee is showing in investigating this.
[Translation]
Senator Bellemare: You said that developing countries are a major market for bitcoin use. Do you think the market will develop in Africa even before it does in very advanced countries?
[English]
Mr. Dearborn: My opinion would be, madam, absolutely. I'm given to understand that Google is in the process of trying to provide wireless to most of Africa through very unique methods of airships. It sounds fantastical, but there are many predictions that the usage of cellular phones is going to go up and they're leapfrogging ahead by not having to put in standardized cell towers, that large wireless networks will be provided by private enterprise and they can pay for this through their advertising. Through that, I think it's just a matter of time that the consumer, having the choice, is going to make that choice.
This is happening in Egypt now. As I said, I'm very fortunate; I've travelled fairly widely. When you're dealing with corruption, it's very disheartening. If I can deal one on one, just my phone to your phone, it gets me around a lot of that. I don't have to pay the bribe at the airport. I think it will be accepted
Another very important thing is that the nature of bitcoin is deflationary. It turns economics on its head. So if it is to become widely accepted, it means at the beginning of the year I have a bitcoin that's worth $400 in purchasing power parity today, but at the end of the year I have a half a bitcoin left, but the half a bitcoin is worth $600.
If these things work in the way that they're designed — and I'm not saying that they necessarily will because it's theoretical — you can divide each bitcoin by at least 2 billion parts. This causes very serious concerns for fractional banking because how do you do lending with interest around that and deflation? I don't believe our financial systems are built on that premises, which is part of its design.
I do think the Third World will take it up, and I don't think there's anything we can do about it. Let's be the leader as Canadians to say this is how you interface a government with a technology. They don't have the civil institutions to have working committees like this, necessarily, that are going to be able to apply it, and it would be a great thing for Canada to lead in.
Senator Ringuette: My first question is for our chair.
Chair, usually you give an update to the members of this committee on your bitcoin situation. You have not done so.
Senator Tkachuk: I was thinking the same thing.
The Chair: I will see if that could be provided by the end of this meeting.
Senator Ringuette: Okay, thank you.
Senator Campbell: Our life depends on it.
Senator Ringuette: I have two questions, and I am hoping that you will express your opinion on the two.
Is bitcoin, as a trademark, the solution or is it just pointing the way?
Second, does any recognized bank accept transactions in bitcoin as of today?
I remember as a young person a lot of discussion about having a world language. Many people did a lot of work on a world language, and it just fell through the cracks. Now we're looking at a world currency in digital form. Wouldn't it be up to the world leaders of the G8 and the G20 to embark on the design? At the end of the day, all of the proponents are saying that they want to remove transaction fees and be able to deal with any country in the world in one currency. All of the practical matters of digital currency seem to be attracting users.
I've said enough. I would like your comments on my questions.
Mr. Eagar: On your very last question, I sat with a team from MIT last week — some of the members were in Vancouver — who were working on an RFP, a request for proposal, from the United Nations. They are looking for a crypto-currency platform to finance foreign aid projects, especially in areas where there's no infrastructure or proper banking. Obviously there are issues with how money and assets are being handled, as we speak. I think the deadline will be closed on the 24th, and a number of parties have already made submissions. It's in the public domain. It's very interesting.
Senator Ringuette: Yes, I understand it's very interesting, but at the end of the day, if different entities come out with different digital currencies, then we're back to the same paper currency situation that we're in now.
Mr. Eagar: I think a common misconception is that bitcoin is the end of the story, and it's not. At the end of the day, I told you about m-pesa, where they take airtime, give it a financial value and call it a ''token.'' If anyone has been to a casino, for those of you who like gambling, you play with chips or tokens. It's the same concept. Bitcoin is a token of value when it relates to a currency.
But on the block chain, you're sitting with a string of code — it could be any block chain — that you could designate as having a value, and the value could be a bag of maize in Africa or three chickens if you're a farmer, whatever you like. I think we've got all the media headlines confusing most of us around the dollar exchange value, minute by minute. That's not what it was about at all.
The invention of the block chain, specifically the bitcoin token, is to show people how easily, like an email, as my colleague here mentioned, it can be sent from one party to the other anywhere on the planet. That's the scary part, but that's also the exciting value proposition of these block chain innovations.
Somebody mentioned Canada. Canada is heavily invested. The bitcoin 2.0 platform is being developed by some Canadians out of Toronto and Ottawa as we speak. Another alternative to that, which IBM is looking at carefully — it's called Ethereum — was developed out of Canada. There's another block chain alternative, also with its own token system. We will be spoiled for choices at the end of the day in terms of a solution that works for everybody.
Mr. Dearborn: If I may, senator, answer part of your first question, is bitcoin going to be the answer? The answer is we don't know right now. However, 164 crypto-currencies are being listed right now, and they're starting up all the time.
I think if we're looking at them, though, we're going to have to realistically look at the name recognition and the market cap. The market cap on bitcoin today is sitting at around US$5 billion. That's how much value it's given globally, which relative to a $67 trillion world economy is very small. But the next crypto-currency is only at $300 million, and these things are fluctuating way more than bitcoin. Bitcoin moves 5 to 15 per cent daily, so that causes adoption problems.
I would posit this: Because it has the best name recognition, one in four persons in the United States has heard of bitcoin. It doesn't mean they know what it is. But some brands such as Jacuzzi, Kleenex and Hoover have become ubiquitous to vacuum cleaners, tissues and hot tubs because they're first out. It doesn't always work that way. You have as many examples or probably more where it does not. I believe that bitcoin has a fairly good chance because it has been though out well, in my opinion.
Secondly, the underlying technology of it being open source really gives it an advantage in that it can evolve, and it is absolutely not centralized by any means.
Because it's the first one, if I were running an export business, I'm would want to start with the biggest one, the one closest to a state of liquidity. Bitcoin is still not there. The best clearing you can get is maybe a 48-hour turnaround, I would guess. We're not close to it being instantaneous. You've heard from other experts that it will take more regulation, more trust and a larger market cap, but it will come.
You can exchange bitcoin with a vendor if they're taking it. They have serious problems with that as well. If I want to buy coffee at Tim Hortons, they can't accept bitcoin if one day the coffee is going to be $2.50 and the next day it's $1.30 and the day after that it's $3.50. I think there are arbitrage models being invented right now to overcome this and that the growth of the technology will be exponential around its solutions. That's really what we're going to see. I hope that answered part of your first question.
I don't know if it's going to be the one that makes it. I think the block chain technology that underlies it has so many potential uses for clearing land titles and property and for stocks and bonds because there can't be any mistakes in it. It's a one-time public ledger, so you don't have to go backwards on trades like they used to do at the TSX when they had runners on the floor.
Senator Ringuette: Will digital users need to have a digital wallet that will need to accept different types of digital currencies? That's what we're looking at right now.
Mr. Eagar: I'll quickly jump in there. Before I get there, in terms of bitcoin right now, 97 per cent of all transactions and capitalization in the market is bitcoin.
In terms of the loyalty card schemes, you all know Aeroplan or Air Miles. It's the same question: Which one will be the winner one day? We don't know. It depends on your usage and adoption.
M-pesa, to answer your question directly, does not even require a wallet. The airtime on the phone is your wallet. As long as you have a PIN on your phone, it can accept any currency that purchased airtime, which becomes a token to transact. They actually use the term ''token.'' You can receive airtime in the form of this token anywhere on the planet and cash it out in any currency.
That is where I believe this technology will move eventually and beyond the wallets, which we're getting stuck on. The block chain, as you might be aware, on which Mr. Antonopoulos advised from his last presentation, got hacked two days ago. They fortunately got all the coins back.
Are wallets the ultimate solution? We don't know. We need to keep upping our security, as we are all aware.
Senator Black: Thank you all for being here. You all have the unusual skill — a sign of great intelligence, actually — of taking things that are extraordinarily complicated and making them relatively simple.
This committee has heard continually, and you've underlined it today, that the development of crypto-currency is in the early stages. You've talked about early stages of email; we've heard about the early stages of the Internet. There is a view that crypto-currencies in one form or another will play a major part in global commerce going forward. Would you agree?
Mr. Eagar: Yes.
Senator Black: Our committee wants to be constructive. We think we have an opportunity to be constructive not only in Canada but on a larger stage. We want to ensure that Canada is seen as an innovator. Our challenge is: What do we need to do? What are the three things we need to do, if anything, to protect that?
Ms. Duhaime: That is an interesting question. Canada is the first jurisdiction to federally contemplate legislation on digital currency. The whole world is watching what Canada does. In a nutshell, I think number one is we put the ice on the proposed regulation, if that's at all possible, until we understand the technology a bit better.
Number two is we engage in a dialogue. The brainiacs in bitcoin, who are in Vancouver for the most part and who have moved to the United States and London in some respects, say that it's frustrating for them that there is no dialogue where people ask them what bitcoin can do and how they might want to see it regulated. When I talk to lawyers and regulators it's the same thing.
One of the thoughts on what we want to do in Vancouver is to have meetings where we take regulators, financial crime lawyers, people who invent this stuff and, as Manie discussed, all the phenomenal technology that Canadians are implementing and putting together that the whole world will be using, and have those dialogues in a room. We have meetings and we all talk together. That's the dialogue that needs to happen so that we each understand where the other is coming from. That would be really helpful.
Number three might seem a bit corny. In London, one of the legislators publicly bought bitcoin as a statement, and it was in all the media. If there were some sort of statement to say that in Canada we are interested in keeping financial technology here in a real way, and we acknowledge the clever people that put all the bitcoin work together and that we want to keep the technology and the jobs here in Canada, that would be my big number three.
Senator Black: Would you have anything to add to that, gentlemen?
Mr. Dearborn: Sir, I'm a farmer by profession, a simple man and a Conservative, so I would say keep it small, keep it simple, and don't build a bureaucracy around it. I've given you a proposal —
Senator Black: I like this. I'm from Alberta.
Mr. Dearborn: Yes, senator. I would like to see a congruency with the technology, that it is actually built into the code. That's why what I've proposed to you —
Senator Black: I have that.
Mr. Dearborn: All the other stuff with the lawyers, and I've paid very many of them, will become complex. It's moving at a pace where complexity is necessary but will not necessarily help it.
The other aspect is that because it's global and we don't control it, keeping it simple is likely one of the best courses of advice that I could offer.
Senator Black: Mr. Eagar, what is ''keeping it simple?''
Mr. Eagar: As I shared earlier on, we pretty much have all the regulation and policies, know your customer and all those things in place as we speak. I visit the ATMs that pop up all over Canada. All of them have ''know your customer'' involved.
It's a myth that bitcoin is not traceable, by the way. Bear with me for a second. If you open an account somewhere and your name is attached to it and the name and physical address of the party receiving the bitcoin is known, you can trace that transaction. There's no mystery here. It's where people go off the grid that things become interesting and we call our lawyers or you call your lawyers.
I'm going to quickly refer to my paper, which I didn't get to. Mr. Ben Lawsky, of New York State, who created all the brouhaha in financial services, said in his opening address that he felt they needed to revisit the definitions of ''bitcoin'' and ''crypto-currencies'' in general from a regulatory perspective and go back to the drawing board to consider a ''bit licence light,'' his term, to avoid cross-jurisdictional and regulatory confusion. If you regard a bitcoin, for example, as a currency versus an asset versus a capital gain, different regulation pops up. If you're a banker, you look at this and go, ''Wow, I don't know where to cover the bases here. Therefore, Mr. Bitcoin Account Requester, no,'' which is very frustrating.
On the way here, I had tweets from people in the bitcoin community saying, ''Please, can you help us get bank accounts?'' Obviously it's not always that simple. It's not our prerogative to tell people what to do, but it shouldn't be that difficult in its current form. With the ''Internet of Things'' coming, I can't even guess where we stop and start to regulate — it's other issues.
That's my short answer.
Senator Massicotte: Mr. Dearborn, you make reference to the Bank of England, which published two reports. Two of them were issued in the last two or three months. I presume what you're seeing there is close to what you're seeing in Canada. Their conclusion is that the amount of digital currency transaction in England today is minimal. They cite a couple of hundred people doing a large amount of volume. They reached the conclusion that there is no risk to monetary financial stability in the economy at this time. From a central bank sense, there's no reason to regulate or to get involved in this issue. It's a bit player. It's a hobby habit for some.
The other comment they make is that with a fixed supply, which is acknowledged by everybody, the volatility will probably remain. Obviously, the people who are motivated produce some, but you have a fixed supply and demand increases if it gets more popular. They say volatility will remain, which is a major negative. The low cost advantage will probably disappear because there will be a need to increasingly charge more.
Could you comment on those issues? Do you agree with their conclusions? Nobody can predict the future, but if somebody is giving you a feeling that not much is there, maybe we should not get involved in regulation.
Mr. Dearborn: I should state clearly that I don't think that I necessarily carry the expertise relative to the Bank of England, which invented modern finance, but I will comment to the best of my abilities.
It's at a very low adoption rate globally; like I said, $5 billion of market cap, much of which is not moving on a daily basis. It's being hoarded. We have an enormous $67 trillion world GDP, I believe; so it's tiny. However, it's important to look at the exponential growth of the adaptation rate.
The person who put my mind around this is Ray Kurzweil, Head Engineer from Google, who has written on exponential growths in technology, how they're adapted and how regulators tend to look at things in a linear-time fashion. With the rate of mobile phones coming online globally, and if it is easy, simple and cheap, the growth rate will be exponential as well.
In 2011 you could buy, I believe, 11 bitcoins for 1 penny. At the Occupy Wall Street movement, somebody paid 10,000 bitcoins for a pizza. This is very small. This morning in Canadian dollars, they're worth $400. That's a very short period of time for the increase.
From the Senate's point of view and our federal government, we should look at that rate of change. Like I said, in 1993 email was out there and it was a hobby thing between professors, et cetera. Now my 90-year-old grandmother has an email account. It's everywhere.
I don't think it's really a matter of the gross amount. That needs to be looked at in conjunction with the exponential growth and adaptation rate. Unfortunately, none of us are in control of those things because it is a global phenomenon. The things that have moved it in the past are geopolitical. The first large run-up in the price of bitcoin in 2013 was the Cyprian banking crisis; and after that the Chinese found out about it and up it went to $1,100. It started at $13 at the beginning of the year.
I really believe that there's a financial crisis in Russia right now. Mr. Putin has basically said, ''We're going to make bitcoin illegal.'' I think, ''Good luck with that.'' But those are going to be places where, when you are forced as a consumer that you don't have other choices, or that this is your best choice, you're going to move towards it. I think it's going to be paralleled with geopolitical movements.
The second thing is that financial-type studies have been done that say the more media it gets, the higher the price goes. There's a lot of hype around this, but that doesn't underplay the technology that's behind it or the concepts.
The very worrisome concept for national banks and for banks in general is that this is deflationary in nature. It's threatening, potentially, to fractional banking and our systems, their being able to create wealth ex nihilo, from nothing, and this is contrary to that. It needs good minds like yours to put the regulatory framework around it.
Senator Massicotte: Mr. Eagar, do you want to comment?
Mr. Eagar: Yes, just on your question of the cost.
The new version of bitcoin that they're working on, where at the moment your cost comes from mining bitcoin, the future version, as all the mining ultimately gets done, is the so-called mining companies will become the processors. So there will be a processing charge. That will keep the thing going, but at nominal cost. I stand to be corrected, but we're talking about 0.01 or less cost to process.
Senator Massicotte: I'm not an expert, but the fellow from the Bank of England seems to be quite knowledgeable.
Mr. Eagar: Absolutely.
Senator Massicotte: He says the costs will go up because of the limited supply.
Mr. Eagar: I saw that.
Senator Massicotte: And he does say there's been immense growth, but even now it will not be enough. There will have to be a significant change in the way this thing works to have growth adequate enough to justify regulation from a central bank sense.
Mr. Eagar: You are aware you can divide a bitcoin by 8 decimal places, and you can continue doing so.
Senator Massicotte: It's still limited to supply, though; it is programmed limited supply.
Mr. Eagar: Correct.
Senator Massicotte: Having said that, let me make a comment. Often people use the increasing price to confirm its success, but if I was the world's central bank, I would see that as a negative. When you have that kind of volatility and change, it's the first evidence to say that this is not a serious currency; this is not a serious method of exchange. Because when you want to exchange as opposed to bartering, you want stability in price. You want certainty. When you see that kind of fluctuation, you say, ''I'm out of here.'' That would be my reaction. Do you want to comment on that?
Mr. Dearborn: Because of the deflationary nature of it, there will be, at the end, when the mining is finished, 21 million bitcoins globally. But, as we said, that is divisible, each one, by 2 billion pieces. If you put 21 million to the power of 2 billion, you get a very big number.
Senator Massicotte: Sorry to interrupt, but I want to get to the issue. The issue is not whether you cannot divide it as many times as you want. You can. It's digital currency. Irrespective of the division, the problem is that the value, given a limited supply, the demand — you know, just supply and demand — will be greater than supply, so you will cause volatility.
Mr. Dearborn: But, senator, this is the same question that central banks deal with when they create ex nihilo. It's just turned on its head. If the Bank of Canada goes to print more money tomorrow, that's come out of nowhere. Dividing it up into smaller and smaller pieces is the exact same concept. With that, it's just flipped on its head.
Part of the reason it's designed this way — trust me; I didn't design it — there was a large amount of anger about the 2008-09 financial crisis when we had investment banks in New York leveraged 50 times deposits. Our Canadian banks are very responsible, 17 times or whatever it is; we didn't have any of those problems. But that did hurt. This is where that grew out of. We don't know who started it. I suspect it's a group of very clever people.
I believe one of the other aspects is that as the global economy grows as a whole and as we increase our productivity, the idea of having a deflationary currency can potentially be helpful if I'm holding something and at the end of the year its purchasing power parity is worth significantly more just because it's getting adapted elsewhere.
The money is simply trust. When I send an email to you, I trust that you will get it. I don't know exactly how it works. In the past, our trust was on the Government of Canada — that's why Her Majesty's picture is on it. It was backed up by the Government of Canada. The Queen was saying, ''This is not just a piece of paper; it is exchangeable for goods and services.''
But if I've lived in the Internet generation, as my children have, I don't have any issues with trust that I can log on and somebody will be at the other end and will participate in that fair exchange with me. That's why I think we're really talking about two sides of the same bitcoin — horrible pun.
Senator Tkachuk: I have a couple comments to make that I'd like you to expand a little further on, and also a question. I'll start with a question to Ms. Duhaime.
When you talked about FINTRAC and our ability to ensure stability in the marketplace by ensuring that money wasn't being used by — we have a reporting system about the banks. You said the more universal we made it, the more people fell out of the system. I wasn't quite sure what you meant by that. I wonder if you could expand on that a little bit.
I was here when this bill first came about after 9/11. Many of us argued that banks shouldn't be making universal reports because banks have a lot of experience in spotting fraud. What they should be doing is reporting where they think they see fraud, mob money or a problem, rather than reporting everybody. I'm not sure that's what you meant. I'd like you to comment on that a little further.
Ms. Duhaime: I didn't at all mean to suggest that banks are reporting everybody or every transaction.
Senator Tkachuk: They kind of almost are, from what I gather.
Ms. Duhaime: Yes, in practice. Definitely there's a problem of over-reporting of suspicious transactions.
Senator Tkachuk: That's what I meant.
Ms. Duhaime: Definitely. You know the way the legislation is. If you have reasonable grounds to suspect that there's been an indictable offence tied to money laundering or terrorist financing, then you report. The part they forget is the reasonable grounds to tie it to an indictable offence. Where they are suspicious of somebody, they report that. So they're reporting a person as opposed to reporting the financial transaction.
If you suspect that someone murdered somebody, an indictable offence, and they walked into your casino with bloody hands, sure, you may report that person because they have bloody hands, but you have no reason to suspect they just murdered someone. So they will report that but not make a connection. That's the problem we're facing; there's an over-reporting.
What I meant by the fact that as we download the industry with financial regulations, we cause this financial inclusion problem, is that we're kicking people out of the system because they may not have identities that they can even get a bank account from, or they can't meet the bank's requirements. Politically exposed people are being de- risked all the time around the world because they're too high risk. Although they're wealthy people, they're not able to get bank accounts as easily as they were before around the world, and so they are now falling into, surprisingly, a financial inclusion problem. The financial inclusion problem now involves people who are wealthy, who are politically exposed, and people who are not wealthy — in Africa, for example, and in Asia.
As we download here, we create this problem here. The concept, which is what the FATF is saying, is that if we move towards a global risk-based approach on anti-money laundering and counterterrorist financing, we actually capture the transactions that are intended to be captured, not the ones that are not; therefore, we will reduce this big problem of financial inclusion here and the banks will quit de-risking clients and they'll take back politically exposed people. Greater ranges of people around the world will get bank accounts, which is a terrorist financing issue for us because these people do not go through the financial system in terms of reporting, and we want them in to monitor their transactions.
Senator Tkachuk: Mr. Dearborn, you talked about 48 hours to clear a transaction. Were you talking bitcoins to Canadian dollars or bitcoins to American dollars?
Mr. Dearborn: This would be Canadian dollars to bitcoin and vice versa.
The exchange that we've been utilizing is based in Calgary, VirtEx. They have a relationship with the Bank of Nova Scotia whereby you can take a cashier's cheque to their bank account with the Bank of Nova Scotia. It takes them time to clear that, and then they go online and there are people looking with bids and whatnot, and there's a price, and they buy. So you put your $100 in and you get a quarter of a bitcoin. They take their transaction fee out. They have a wallet on the account. You're wise to move it off of their account, because exchanges have been the main targets of hackers. You move it to your own wallet.
If I wish to reverse that transaction and get my money out, I have to post into their wallet. They've got to know that my bitcoins are for sale, and then there's got to be a bid price, all agreed upon, and somebody has to buy it.
So more or less, 48 hours would be the quickest. There are exchanges in Hong Kong, other places, that are larger and possibly quicker. We're dealing only in Canada for a whole number of reasons, but that's our experience.
Mr. Eagar: But there are exchanges that already are connecting to Interac and Vogogo, which is a recent arrival on the scene, which could expedite. If you've been cleared beforehand in terms of your profile, know your customer and whatever, it could go much faster.
Senator Tkachuk: I was shocked at how quick it is. We're kind of spoiled in Canada, but my daughter lives in the States. If you deposit a cheque in the States, you don't get any cash for a couple of days. It is not like it is here. It takes two days, three days, sometimes five days to clear a cheque in the United States.
Senator Massicotte: You're supposed to have money in your account, David.
Senator Tkachuk: What's that?
Senator Campbell: You're supposed to have money in your account.
Senator Tkachuk: I was quite surprised at how quickly you can actually transact bitcoins into cash being 48 hours.
Mr. Dearborn: Senator, one of the largest players for the retail side of this is doing it in much lower amounts. Home Depot is taking bitcoin, Virgin Airlines, the NBA. Globally, there are about 150 vendors, which isn't very many, but those taking bitcoin are adding up daily. Many of them are using a clearinghouse based in North Carolina — I've forgotten the name — and basically it becomes instantaneous. I believe that they're doing bitcoin pools, arbitrage basis. They are charging a service fee.
Mr. Eagar: They are like a clearinghouse, if you wish.
Mr. Dearborn: I'm not aware of any in Canada.
Mr. Eagar: As you probably heard about the verification, when you do a bitcoin transaction, it can take up to 10 minutes. That's how long it can take, and there are bitcoin service providers now that will ensure the value at the current whatever dollar rate, so you always get that value, for a small fee. Merchants are obviously concerned. I spoke to somebody two days ago, a shop that sells meals, and then the bitcoin price drops. I hope you bought at a good price, sir.
You can now cash out immediately through these clearinghouses. So people are really stepping up and providing these financial services. Obviously the first price for them would be to officially do it through a bank account and so forth, but they are using these mechanisms and reporting and have a ledger and are auditable as we speak.
Senator Tkachuk: Mr. Dearborn, I have one more question. You had talked about countries that would be outside of what I would call the European-North American framework as being real opportunities for the use of bitcoins: Egypt and African countries where people don't have access to banks.
I would also think that where you have political instability, people would seek — for example, I'm sure the Russian people aren't very happy what's happening with the ruble right now. They probably would be looking for bitcoin. Nonetheless, could you give me an example of one or two countries that have taken an interest in this and where it's countries themselves, not just groups themselves, but countries that have taken an interest and are making progress?
Mr. Eagar: I had a fascinating conversation with Vodafone people who own this m-pesa solution in Kenya and now in seven other countries in Africa and just launched in India. They formed a partnership with IBM that is adopting a block chain version. They don't know which one to choose yet, but it was an assessment where they said it was just on the mobile Vodafone company — one of my past clients, which is why I know so much. I was involved with them for nearly a decade. They're going to open up the system and look at how it can be utilized as a utility across mobile service provider platforms. IBM was very keen on that, working with the Gates Foundation, the World Bank and others. They didn't want to talk about bitcoin per se, but they used the term ''crypto-currency,'' a layer that they want to add to this to do exactly what we're talking about.
Big players like that are starting to tiptoe into it, starting to do proofs of concept. There's the BitPesa already in Kenya that sits on top of the m-pesa where you can use bitcoin if you wish in and out of the pesa in that country. It's a fascinating example.
Mr. Dearborn: I think Iceland has moved that way after the financial collapse.
Mr. Eagar: I heard yesterday about talks in Venezuela.
Mr. Dearborn: Bitcoin had been prevented for a long time to be allowed to work on the Apple platform. One of the speculations was that Apple, sitting on $81 billion of cash, was going to launch its own Apple crypto-currency. They haven't done that, and they did allow bitcoin finally.
Mr. Eagar: They are launching Apple Pay with the token.
Mr. Dearborn: Yes. The pace, because it's global, because it's computers, where there are examples — well, I can guarantee it. There are many that I don't know about.
Going back to what I said earlier was that at this point bitcoin just happens to be the largest. I think you said 97 per cent, and so it is the leader.
In our own business, in looking at the verification process, which is known as mining, we chose that avenue as opposed to an exchange because if it did come down to another crypto-currency that supplants bitcoin, our infrastructure would be able to verify the block chains that they're utilizing, and we'd still be in business, right? It's not all your eggs in one basket.
Also, as computing power anachronizes itself — this is the technical stuff — you can move it to smaller exchanges where a dogecoin or a litecoin or whatnot, it may still be viable to make some money mining those crypto-currencies, whereas you don't have the hashtag power for bitcoin anymore because it evolves very quickly.
Mr. Eagar: On that note, SWIFT — I think it's based in the U.K. — put out a proof of concept to start switching crypto-currencies in the future, so all the big players are looking at this.
Senator Tkachuk: Thank you.
Ms. Duhaime: Ecuador just finished a big study, and from what I understand, it might be the first country to come on board with some legalized form of bitcoin.
Senator Greene: I'd like to ask a question about regulations. We've talked about them in general, but we haven't talked about them in specific terms. I'm not a fan of regulations. I'm a libertarian before anything else, I think. We might need a regulation or two simply to overcome the anxieties about crypto-currencies and bitcoin being used for nefarious purposes. Would a regulation that required the bitcoin to be monitored by FINTRAC, or something like that, be a regulation of interest? What impact would a regulation like that have on bitcoin?
Ms. Duhaime: You mean different than making it a money services business and requiring reporting?
Senator Greene: I mean in terms of should FINTRAC monitor, for example, the public ledger.
Ms. Duhaime: No, I don't think so. One of the points about the Bank of England report is that the number of transactions is insignificant. One of the other things is that the U.S. Treasury said there's really no risk at the moment because it is insignificant. They intend to look at it more closely when it does become more significant.
I think the solution on the regulatory front, which is why I say it would be nice to have some sort of dialogue, is at what point do we want to think about regulating it? I think it's too soon now. My opinion is let's just let the technology thrive and then think about regulating it at the point where it does become a risk.
Senator Greene: That's the answer I wanted.
Ms. Duhaime: We don't know it's risky yet, so let's let it grow.
[Translation]
Senator Maltais: In response to Senator Tkachuk's question earlier, you provided an explanation in which you referred to countries such as the Ukraine. I would just like to point out that Canada has signed numerous free trade agreements, including with Europe, South Korea and possibly Asia.
Is there a benefit to Canadians? Could these countries one day deal in bitcoin?
[English]
Mr. Dearborn: In 2011, I was involved in international trade for Brandt Agricultural Products, the largest grain handling manufacturer in the world. Gavin Semple and Shaun Semple, wonderful entrepreneurs, built a billion dollar business and make wonderful farm equipment. They sell it all over the world and it moves by container.
This is at the same time that I got very interested in bitcoin. These aren't real numbers, but I will be demonstrative of how this works. If we took a 40-foot open top container and filled it with GrainVacs made in Canada, let's say that they had a value of $100,000. Our customer is based in Ukraine and we have to take a position on the price in U.S. dollars. They're going to have to take a position on the price in U.S. dollars as well. That $100,000 now, and we'll say it's $7,000 for shipping, now becomes $110,000.
[Translation]
Senator Maltais: I think you misunderstood my question. I am asking about countries with which Canada has signed free trade agreements. I am referring to NAFTA with the U.S., the agreement with the European Union, the agreement with South Korea, and the agreements currently being negotiated with Asia. Could Canadians do business with these countries in bitcoin?
Do you understand what I am getting at?
I am not interested in hearing about the Ukraine, just the other countries I mentioned.
[English]
Mr. Dearborn: Any country in the world that has the Internet and computers could conceivably do business in bitcoin.
Mr. Eagar: I think what you're referring to is that historically we had free trade zones, and where there have been trade agreements, one can designate certain goods and services as part of that free trade zone-type example. One could tokenize all trades within that district to not be ''vettable'' and taxable, et cetera.
[Translation]
Senator Maltais: Who would decide that? You said one could tokenize that district, so who would that be?
[English]
Mr. Eagar: A friend of mine, one of our board members, is a facilitator at BRICS meetings representing the World Bank. You're obviously familiar with Brazil, Russia, India, China and South Africa coming together and creating a development bank and free trade zones amongst themselves, just to give you an example.
One of the questions that came up in these meetings is if we should have a crypto-currency or a token through which we exchange between ourselves by mutual agreement. Obviously there need to be at least two parties at the table to agree on this token, what is taxable or not and what is an incentive for trade within that free trade zone, which could be virtual. That is where I think you were heading. It could be in the virtual space.
[Translation]
Senator Maltais: Is bitcoin currently being adopted in the European Union? I do not want to hear about the Ukraine. I am referring to the European Union, which Canada just signed a free trade agreement with. Are we seeing bitcoin adoption there?
[English]
Mr. Dearborn: Yes, sir. Bitcoin today, though, is very small. It is computer nerds. It's not being adopted at the industry level yet. It's not being used for large transactions, by and large, except for historically very illegal ones, the Silk Road, et cetera. It was a very good way for drug lords to move currencies around because it was non-traceable.
Is industry using it yet? No, but finishing my example, it would cost an extra $3,000 for that container with Indians having to switch to U.S. currency, hedging up and down for the seven-week transport, with us having to do the same. You could do it with bitcoin with the push of a button, 10-minute verification and the total cost on that $100,000 is six cents. That could all be added to the bottom line.
We're not there yet in industry widely adopting this for a whole number of reasons, but I do believe it's coming because of the underlying factors of it being easy and frictionless.
But it does raise serious questions about tax evasion. I can't sell the lentils from my farm to India and claim no Canadian dollars on them when I'm getting paid in bitcoin. That exists as a theoretical today, which could easily be set up, but it's not good for our country. That's why we need a framework. We will never have the institutions to watch everything that's being exported and imported.
I hope that helped answer, sir.
Mr. Eagar: I actually have an answer for you from the European Union, and it's in the document which I didn't have time to read out to you. Our apologies for getting it to you late. It will be translated into French. I quote Mr. Gareth Murphy, Director of Markets Supervision for the Central Bank of Ireland, referring to the European Union, and it's under the title ''hybridized finance.''
He envisaged, based on talking to his other colleagues in the European Union, a hybrid bitcoin fiat future — bitcoin, whatever currency.
The existence of a 'euro-denominated economy' and a 'virtual currency economy' raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services). . . . Multi-currency economies are not unusual. For example, the US dollar is accepted in many economies alongside the local legal tender. Also, there are a number of regional currencies in existence in parts of France and Switzerland which aim to encourage transactions in local goods and services. But unlike these examples, rapid advances in . . . .
He goes on to talk about the implications of these new financial technologies, and it goes on and on. He advises, based on their workshops, the key issues that should be addressed.
I'm going to refer you to the paper, which you have, and we'll get it translated. I can carry on and share more with you if there's time. But yes, they are looking at it, short answer.
The Chair: Mr. Eagar, a clarification. I'm going to focus on the word you used, that you can ''trace'' the transactions. Tracing means you know who sent it and you know who received it. I don't know if you're using the words ''all transactions,'' but let me just start with what you have said about tracing.
Now I move over to Ms. Duhaime, and I see in her remarks, ''. . . anyone with an anonymous Bitcoin wallet, and there are lots of them, can transfer Bitcoin anonymously.'' You go on to give examples. You said they are theoretical and there's no evidence, but you go on to say, ''. . . I know anecdotally, that in China they use Bitcoin as a way to receive bribes and as a way to move assets . . . .'' You conclude by saying, ''. . . you can move value anonymously to the Cayman Islands without CRA ever knowing but again there is no evidence that this has ever occurred.''
I'm unsure. You're saying you can trace everything, and you're talking about being totally anonymous.
Ms. Duhaime: The clarification on my end is that you can have wallets that are set up anonymously, and so I'm talking about those types of anonymous wallets. I happen to have one, which is the example I gave. People in China tend to have those types of anonymous wallets.
When we talk about tracing, we talk about the block chain which does not necessarily involve wallets that are traceable. When we talk about tracing of wallets, it's because you can trace to someone's email address, ergo you can find them if you're the NSA or anybody else who has the knowledge or ability to do that.
Manie can explain further.
Mr. Eagar: If you get a card from me, you'll see a QR code on the back. Now this is a traceable wallet. My name, address and everything is attached to this. So you can have either in this universe, just as you might put physical cash in your socks and go overseas and apply it there anonymously. I think that's the equivalent.
What I was referring to is people can decide to go off the grid, not report and not disclose, and that is I think what my colleague Ms. Duhaime is referring to.
Senator Greene: Why wouldn't we all go off the grid, then?
Ms. Duhaime: A lot of people do.
The Chair: How do you suggest that you control that or regulate it, or should it be?
Ms. Duhaime: That's the big dilemma with bitcoin regulation. How do you regulate off-the-grid wallets that are set up through the Tor network. It's really difficult.
Senator Tkachuk: Could I add something to that? We were told by previous witnesses that these were traceable.
Mr. Dearborn: They are.
Senator Tkachuk: The idea that they weren't traceable was a myth, that there was no way you could be using this for nefarious means because you could always find out who the end user was.
Mr. Eagar: If they are at an address with a name that you can identify. Everything on the block chain is traceable —
Mr. Dearborn: Yes.
Mr. Eagar: — full stop. That was a correct statement.
Senator Tkachuk: What does it say on the block chain when a — or does it even enter —
Mr. Eagar: It will show you the physical locale at which the purchase took place and obviously where it was redeemed, but it won't say it's you.
Senator Tkachuk: I got it.
Ms. Duhaime: It will give your big numerical wallet address, and someone can ascertain your email address from that and then from that go to the ISP and find out that's you. You're thinking it's a lot of steps. It's not what we think of in terms of AML law, but you can have wallets that don't have those steps, that don't have an email attached to you, or they do and it's fake, or you bought it some other way, such as in a Tor network underground that keeps it anonymous.
Mr. Eagar: In fact, two students from Paris, France, announced two weeks ago that they came up with software that can do exactly this.
Senator Tkachuk: Okay.
Mr. Eagar: It is traceable, but with some effort.
The Chair: The term we've heard is how you can go off the grid.
Mr. Eagar: In other words, make it difficult to trace but not untraceable.
Ms. Duhaime: Well, we may have to disagree on that point.
The Chair: We have disagreement, I see.
Mr. Dearborn: If I could comment on the regulatory aspect, I think that I want strong-arm forces and Mounties and schools and everything else. If I go into a licensed business to buy my dinner and they accept bitcoin, I want to see that they have a Canadian bitcoin stamp that says my transaction is participating in the good of my country.
If it's really small, I envision a day that I don't have to deal with CRA, that it's just transactions and it's all done for me beforehand. Wouldn't that be lovely? Not so good for KPMG possibly, but the long and short of it is it could be very simple.
All of us like living in the greatest country in the world, and it costs money to do that. So are you going to have people who try to avoid taxes and all those things? Yes.
Before regulations come in, it's going to be more abundant, but afterwards, at some point, if this becomes widely accepted and widely used, there's going to be the ability for everybody to adapt and say, ''Where the money is going. Are you hiding wallets?''
If you're a business using one of these wallets, you can trace if any of that bitcoin is leaving to go to anonymous wallets.
Mr. Eagar: With respect, the wallets that we've had until now were first-generation wallets. We could have wallets out there that, by design, capture all this information. The community that's busy with developing could decide that, and we could regulate that only these wallets are approved, for argument's sake. I'm not saying to do it, but that would make it a lot easier for the people who wish to trace these accounts, for whatever reasons.
The Chair: Thank you.
Mr. Eagar: It is still early days. Remember, bitcoin is only a year old in terms of visibility in the public domain.
Senator Tkachuk: Does the size of the transaction create any alarms, or are they all considered in the same normal way and it doesn't matter the size?
Mr. Eagar: Well, there were many who bragged a week ago that they sent 80 million from somewhere to somewhere in minutes using the Ripple network, I think. I'm not sure.
I don't think there's a ceiling on the amount. It's just what the clearinghouse typically can process at the time. Do they hold enough to honour the deal between the parties? Arguably, no.
Mr. Dearborn: And there shouldn't be a technical problem with regard to the mining for how much value is in the bitcoin because the cryptological calculations should relatively be the same.
Mr. Eagar: Think about an email. Can you send an email with many attachments? It's possible if the other person can handle 10-megabyte files. It's the same principle.
Senator Hervieux-Payette: I'm trying to figure out one thing. Yesterday the minister said that he's going to try to deal with the report of this committee about different prices for the same retail item between Canada and the United States. For an item such as a camera, something that people buy in airports everywhere in the world, it would have a different price whether you are in Hong Kong, Paris, New York or Vancouver. How do you reconcile that with your bitcoin?
Mr. Eagar: I don't know. Obviously, again, you declare on the network. Like any good citizen, you're supposed to declare your purchases and pay the relevant taxes.
Senator Hervieux-Payette: No, my question has nothing to do with paying taxes when you come back.
Mr. Eagar: It's the price differential.
Senator Hervieux-Payette: I'm talking about the difference in price. I suppose if I pay with bitcoin, I already have an account with bitcoin, so what are they going to deduct if the price is written in dollars or yen or euro or any other currency? How do you reconcile that? Do you know on a daily basis the value of money in all of 190 or 200 countries? You even have a difference between today and tomorrow for bitcoin only, so how do you handle things when you have over 200 different currencies that you have to adjust to in order to buy the same product?
Mr. Eagar: I hear you. I don't have an answer per se, but imagine you buy on eBay. You're familiar with eBay?
Senator Hervieux-Payette: I don't buy from there, but I know about it.
Mr. Eagar: Goods are sold second-hand or discounted or whatever. If I find something there that's cheaper than I could find down the road and I purchase it, who's going to stop me? I don't know. Obviously mechanisms need to be worked out in the virtual world.
Senator Hervieux-Payette: So you agree there's nothing right now that can adjust?
Mr. Eagar: But the bitcoin will go wherever —
Senator Hervieux-Payette: How many bitcoins will be used since the value of the bitcoin itself fluctuates a lot? We are talking about the price of the same good, which is also not the same in many countries on the same day. What would be deducted from my bitcoin account?
For instance, today, Mr. Chair, you should have $400 in your bitcoin account, so very shortly you'll be able to take us to dinner.
It's very nice to talk about this and that, but I have not talked about financial statements yet. You always have the positive side and the negative side. Will my debt vary day to day or twice a day or many times a day because bitcoin also has fluctuations?
Senator Tkachuk: It would be a price index. When you deal internationally, everything is priced on the American dollar. See, we don't talk about Russian currency or Canadian currency. Everything is bought in the American dollar on the international stage, so there's only one currency.
To obtain that currency, you've got to go to the bank and get it exchanged and pay, and you deal with your own. Things would be priced in bitcoin. That's the way they would be priced.
The Chair: Senator Hervieux-Payette, continuing with your question, please.
Senator Hervieux-Payette: Your explanation would certainly work for the Western world, but since the Chinese would like to take over, we have so many problems agreeing with the different economic blocs, and they would have to agree on a certain value so that every country will deal with bitcoin.
Mr. Eagar: Parity, yes; absolutely.
Senator Hervieux-Payette: But we don't have that yet. Who will take the lead on that?
Mr. Dearborn: I believe you're actually asking quite a deeper, philosophical question because bitcoin, in and of itself, is simply binary code. It's ones and zeros that exist in virtual space electronically. They cannot exist without a computer system. They cannot exist without electricity. You cannot hold them in your hand, which gets to the real essence of what they are. They're simply trust. I trust the person at the other end that I'm going to do an exchange of binary code with them, and I perceive value from that. I think it's a very open, free-market piece. There it is.
I don't know that the entirety of your question is really one that can be framed —
Mr. Eagar: If it's a free market, it will get figured out, but I hear your question.
Senator Hervieux-Payette: You have consumer goods and you have, of course, many more industrial goods. I'm talking about a plane or major pieces of equipment and so on. I'm saying that I don't know which commission at the United Nations would take part, or how we could do that. It's very nice to talk about trust, but if there was so much trust, we would not have so many problems with all the countries of the world.
So I say to myself, how can we come to an understanding that these units of zeros and ones, as you say, will be recognized as units that we feel comfortable with and everybody will take as many as it takes for a very large transaction? The small ones, I think I can manage that, but the big ones I have a problem with.
Mr. Eagar: My stock exchange friends have already figured this one out. They treat it like a derivative or futures, so you lock the value by mutual agreement and the transaction takes place at that designated value, end of story.
Senator Black: The question I was going to ask is exactly the question our chairman asked, because I heard a contradiction, which frankly, in my simple mind, has thrown a spanner in the works for me. Could you help us out with something on a go-forward basis?
Mr. Eagar, in your letter to us of October 14, the last paragraph on page 1, I want to take you up on that, where you say, for the purpose of the record:
Our interest in appearing before the Committee is to address ways in which digital financial products may present risks of terrorist financing, money laundering, sanctions and tax avoidance . . . .
All of which in my mind I thought, well, that's not really going to be a worry because we can trace everything. Now I learn we can't.
You were going to suggest ways in which the financial crime risk can be mitigated within the technology without stymieing financial innovation. Would you undertake to get back to us with how to do that?
Mr. Eagar: Absolutely. I think I have some answers, but let me do our work first, for the record.
The Chair: I thank you. On behalf of all of the members of the committee, I'd like to express our great appreciation. You've been outstanding witnesses, very helpful.
Before I conclude, I do want to be on record of indicating to you the value of my bitcoin. As you know, at an early meeting in our study, I purchased 0.18 bitcoin for $100, and I am advised today that it is now worth $72.39, so there goes dinner for this year.
Senator Massicotte: The relevant question: Do you trust him?
Senator Tkachuk: The relevant point is you should have sold high.
Senator Campbell: You should have got 20 bucks from each of us.
The Chair: Thank you to everyone again and a good holiday season to all.
(The committee adjourned.)