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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 26 - Evidence - March 26, 2015


OTTAWA, Thursday, March 26, 2015

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:31 a.m. to study the use of digital currency.

Senator Irving Gerstein (Chair) in the chair.

[English]

The Chair: Good morning and welcome to the Standing Senate Committee on Banking, Trade and Commerce.

Today is the nineteenth 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 our meeting will be split into two one-hour panels. In our first hour we will hear from MoneyGram International and in the second hour we will hear from professor of finance Samir Saadi from the University of Ottawa.

Moving to our first witness, the focus will be on a money service business and how it relates to digital currency. Today I'm pleased to welcome, from MoneyGram International, Mr. Derek McMillan, Senior Director, Regional Compliance.

MoneyGram is the second-largest global money transfer and payment services company in the world. It provides quick and reliable worldwide fund transfers over mobile and online channels through their vast network of over 350,000 agent locations in over 200 countries.

We will begin with an opening statement from Mr. McMillan, to be followed by questions from senators. Mr. McMillan, thank you for appearing before us today. The floor is yours, sir.

Derek McMillan, Senior Director, Regional Compliance, MoneyGram International: Mr. Chairman, thank you for the opportunity to appear before the committee. As you said, my name is Derek McMillan and I'm the senior regional director for compliance for MoneyGram International. I'm based in Toronto.

MoneyGram, headquartered in Dallas, Texas, is recognized throughout the world as a leading global payment services company. We have over 2,500 employees and over 347,000 agent locations worldwide.

With 2.5 billion consumers around the world, about half the world's population, not being able to rely on traditional banks for basic financial services, MoneyGram provides critical access to money transfer services to millions of these consumers who send funds to loved ones for life's essentials. MoneyGram is a service that helps people send money anywhere in the world quickly, reliably and affordably.

From New York to New Delhi or Ottawa to Nairobi, in more than 200 countries MoneyGram's money transfer service moves money quickly and easily around the world through person-to-person, direct-to-account, ATMs and kiosks for cash deposits and cash receives, cash to a mobile phone and cash to a card.

MoneyGram is dedicated to investing in innovation and technology in order to offer our customers as many convenient and accessible options to send and receive money as possible. While retail locations will always play a critical role in serving our customers, we also believe that online and mobile money offers opportunities to make moving money more accessible for millions of people, especially those in rural areas that lack easy access to bank locations.

In addition, consumers can now send money via MoneyGram directly into bank accounts into four of the world's largest remittance receive markets — China, Mexico, India and the Philippines — and into the largest mobile wallet consumer bases in the world.

MoneyGram is proud of the wide variety of services it offers Canadians through its 6,000-plus agent locations and its long-standing relationship with Canada Post and our retail agent network. We remain committed to working with our agents to provide the most competitive, secure, reliable and accessible money transfer services to our customers in Canada.

I understand that this committee has been reviewing issues surrounding crypto-currencies. While MoneyGram is dedicated to supporting innovation, MoneyGram does not accept crypto-currencies at this time. We have heard concerns regarding crypto-currencies from various regulators which classify the activity as high risk. If or when crypto-currencies become a regulated currency or commodity, MoneyGram would entertain working with crypto-currencies the same way that we do with other payout methods today. We would also hope that crypto-currencies would be regulated in a manner similar to money transfer businesses with regard to anti-money laundering and safety and soundness requirements.

Thank you again for inviting me to appear before the committee, and I look forward to your questions.

The Chair: Thank you, Mr. McMillan, for your opening statement.

Let me understand. An individual goes to an agent of yours in Toronto and tenders Canadian dollars. They're going to send it to New Delhi. The recipient in New Delhi will receive Indian rupees?

Mr. McMillan: Yes.

The Chair: Where does the exchange actually take place? In Canada? Or is it taking place in India? I'm interested in how much time it takes from when you go in and you place that money at the agency in Toronto to when it is receivable in India.

Mr. McMillan: Sure. I'll walk through that transaction with you, then. So a person walks into an agent location in Canada and provides an amount of money in Canadian dollars to send to their relative in India. The agent in Canada collects the funds and the information that we would need from the sender and enters it into MoneyGram's systems. The system controls what elements would be required to obtain from that sender. The more you send, the more information we would get.

That agent then completes the transaction and gives a reference number to the sender. That sender then needs to communicate that reference number to the receiver in India. In between the send and the receive, MoneyGram sits in the middle. So MoneyGram has now received this information and who it's being sent to. A number of controls and checks are in place in the transaction. From a compliance standpoint we have a number of rules that we would be looking for on the transaction, but assuming that it doesn't hit any of those rules requiring us to collect potentially some additional information, it's available to be picked up in India.

The receiver in India walks into a location knowing that they have money available for them in their name and with that reference number. They walk into the location in India, provide that agent and employee with the reference number. That agent will look up the transaction in their system. They will identify it, ask the receiver to verify their information and enter that into our systems. With that, they would then pay, in rupees, the amount to the receiver.

How the funds actually move, the agent in Canada had a bank account and the agent in India had a bank account, and MoneyGram settles with the banks of the agent a net settlement at the end of every 24 hours. So we settle with the agents.

So if an agent sent five transactions and paid out one, the net of four transactions that they collected we would pull from their bank account. If the agent in India had the reverse, we would push money to the agent in India.

The Chair: Just so I understand, if I were to take the $100 that I want to transfer to India, I pay a fee at the point that I'm giving the money to the agent in Toronto? There is a transaction fee, I assume, for the conversion, and does the recipient pay a fee when they pick it up?

Mr. McMillan: No, the fee is paid by the sender.

The Chair: All fees are paid by the sender?

Mr. McMillan: Correct. And it includes the transaction fee and then a potential currency exchange fee as well, which is transparent to the consumer. It's with that fee that MoneyGram would compensate the agent who sent it and paid it, but only the sender pays the fee.

The Chair: And the question I asked that you didn't answer, if I went in this morning at 10, when is that available to the recipient in India?

Mr. McMillan: It will be within minutes.

The Chair: Minutes?

Mr. McMillan: Again, subject to the controls that it may hit. We will often slow down certain transactions because it hits some sort of rule or typology or sanctions list. So it's not every transaction, but most transactions are available within minutes.

The Chair: Thank you. I'm going to go to my list of senators with questions.

[Translation]

Senator Bellemare: Thank you for joining us today, Mr. McMillan. You partly answered my question.

If my son is in South America and has lost all of his belongings except his cell phone, my understanding is that I can't use your services to send him money because he doesn't have a bank account in the city he's in. That would involve a transfer from one bank account to another. If all he had was his cell phone, he wouldn't be able to receive the funds. Is that right?

[English]

Mr. McMillan: Thank you for the question. I'll clarify that account situation. That was the agent that offered our service, not the consumer. We do have options where our senders can send directly to a bank account, but in our person-to-person typical money transfer, the receiver does not need a bank account. They walk into the agent location, provide information to that person at the agent location and collect the funds. There is no bank account involved. It's MoneyGram settling with the agent's bank account.

[Translation]

Senator Bellemare: But he still has to walk into your agent location. The transfer couldn't be done using a credit card and a cell phone, say.

[English]

Mr. McMillan: We do have some corridors, like Canada to China we mentioned, where you could send directly to a bank account. We have situations in Kenya where you can send directly to a mobile phone, so there are certain situations where walking into the location isn't required, but that's the bulk of our business.

So depending on the cell phone provider and whether or not MoneyGram has a relationship with that provider and they have mobile wallets and we've set up an agreement to work with them, then maybe that is an option, but generally that is limited to the situations where we have that relationship set up.

Senator Massicotte: Thank you for being with us. This is useful to our deliberations.

Our chair asked you about the process, but I wouldn't mind getting to the costs. I know you're going to say "depends, depends." In some poor countries $100 is a lot of money. So let's say I want to send $100 to an African country or something. Give me an idea from a commission sense how much does the transaction cost percentage-wise? How much is the currency cost beyond the actual currency in the open market? Give me a sense of costs there.

Mr. McMillan: Sure, and as you said, it does depend on how much you send.

Senator Massicotte: I'll give you two instances: $100 bucks and $1,000.

Mr. McMillan: All right, on $100 it certainly would be a higher percentage because there's a minimum amount that we would need to collect in order to pay our send and receive agent.

Senator Massicotte: How much is that? What is that number?

Mr. McMillan: For $100, again, it depends on the country you're sending it to as well. I don't know the entire fee schedule, but generally —

Senator Massicotte: Choose a country you know well that you can give me the answer to.

Mr. McMillan: I would say $5 to $10 would be what I would be familiar with.

Senator Massicotte: And that is the transaction cost. How about the currency?

Mr. McMillan: Currency varies by country. A lot of countries would pay out in the same currency that it was sent — not for Canada, so that's maybe not an issue. But it would probably be between zero per cent to a couple of per cent.

Senator Massicotte: Beyond the actual market conversion, obviously?

Mr. McMillan: Yeah.

Senator Massicotte: And how about if it was $1,000?

Mr. McMillan: The percentage would go down, but again I know it could range — again, not specifics, but I've seen nine ninety-nine up to —

Senator Massicotte: Nine ninety-nine is the transaction costs?

Mr. McMillan: Yeah. And up from there. Again, I don't — 200 countries and it varies.

Senator Massicotte: Okay.

Mr. McMillan: But that would probably be the low end.

Senator Massicotte: Earlier you said "depending upon the requirements." When you said that, you're referring to the requirements to know your customer and then the five sums. You have internal policies where you say if it's more than $1,000 we need this kind of information or that. Give me an idea of what you do there.

Mr. McMillan: Sure. And a lot of these requirements come from the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the implementing regulations.

So with that act, money transfer companies are required to collect identification at $1,000, and date of birth and occupation. There are also situations where if you have a business relationship with a customer you have to collect additional information and assess the risk of that relationship with that customer. Then reporting requirements kick in where if you're sending out of or receiving from outside of Canada at $10,000 or more you would need to file a regulatory report, an EFT report with FINTRAC. For situations where you would be suspicious of the activity, again, you would need to monitor for that.

Senator Massicotte: The $1,000 comes from where? That's because it's deemed to be a wire transfer? Is that where it comes from?

Mr. McMillan: Money transmission, yes, it's 1,000 or more.

Senator Massicotte: Relative to the fact that many people, you say, inside Africa, don't have bank accounts and under your service it's predominantly a physical pickup of the cash, do you have a lot of locations in Tanzania or Kenya? Is it difficult for people to pick it up? Are there a lot of locations?

Mr. McMillan: Well, our goal is to make it as convenient for our customers as we can, so we're always looking for partnerships, and in many countries it's banks and post offices with a wide spread so it isn't inconvenient for the customers to pick it up.

Senator Massicotte: It isn't an issue for most people?

Mr. McMillan: Not an issue, but I'm sure there are stories where people have to travel a couple of hours to pick up their funds; but, in general, with the 350,000 spots where they can do it, it is convenient.

Senator Massicotte: Yes. Talk to me, if you could, you got Apple putting a lot of pressure coming up with this virtual currency in their manner. It's not decentralized. It's centralized. You got PayPal. How do you see those, say, three years from now, five years from now compared to yours? How do you see this evolving?

Mr. McMillan: As far as the evolving, MoneyGram as well is looking at ways to innovate and ways to change. Besides that, I think for a long period of time there will always be a need for cash in some countries. I think the movement of a country in Eastern Europe or Africa to something other than cash is a long way away, but I do think it is something that will continue to evolve.

Senator Massicotte: What's your average transaction amount, transfer-wise?

Mr. McMillan: It's $300 to $400 Canadian on the send side, roughly.

Senator Massicotte: Thank you

Senator Tkachuk: Thanks, Mr. McMillan. When you mentioned that you wouldn't be looking at using a digital currency like, say, bitcoin, unless there was regulation, what kind of regulation would you look for to adopt maybe a system like that?

Mr. McMillan: An example would be our compliance program. We take a risk-based approach. So at this point, with what we've seen and with regulators and what they've told us, it is definitely a high-risk scenario, and so what we would want is adequate controls in place to mitigate a lot of that risk in order to feel comfortable partnering and offering some additions to our services.

Senator Tkachuk: Would it require regulations or backings of the currency by the country involved? I don't know how you maintain a stable currency when it trades. The Canadian currency is going down compared to the American currency going up compared to the euro. It gets awfully complicated, but I would think bitcoin or a one-world currency would be a lot cheaper to transmit than worrying about all these different countries and all the different currencies.

Mr. McMillan: I would agree with that. I guess where I'm focused in and what my role at MoneyGram would be, the anti-money laundering, terrorism financing aspects of things, is the anonymity of a product is attractive to criminals as well, and I think if there was something that helped with that issue, that would go a long way.

Senator Tkachuk: Okay, thank you.

Senator Tannas: Thank you for your presence here today, Mr. McMillan. We heard yesterday about m-pesa. You mentioned that in Kenya you actually hook into a phone network. Is that what you were talking about?

Mr. McMillan: Yes.

Senator Tannas: They're in the transmittal business, obviously, and in the storage business, right? Are you looking at getting into the storage business at all or are you active in any other countries — m-pesa in another place?

Mr. McMillan: I am not familiar with it from a U.S. and Canada standpoint as a wallet or for holding funds. I know that different money service businesses are looking at it for sure.

Senator Tannas: Your organization is uniquely positioned. I think the chair mentioned that you're No. 2 in this space. Western Union, I assume, is No. 1; is that right?

Mr. McMillan: That's correct.

Senator Tannas: Your story and the way you do things are virtually identical, are they not?

Mr. McMillan: There're very similar companies.

Senator Tannas: You guys and Western Union would be uniquely positioned to give us a view on regulation around money service businesses. Among the countries you operate in, where does Canada stack up in terms of the level of rigour of regulation and so on? What do your colleagues from MoneyGram International and the compliance guys in Kenya and Germany tell you when you compare notes?

Mr. McMillan: From an AML standpoint, I know the FATF provides recommendations for countries. Canada is a member and continues to update its regulations. I would say that Canada has a strong regulatory regime based on the 200 countries that are out there. Specific to that, a lot of countries don't have the equivalent of the EFT report that tracks the movement of money across the border; and that's an element in Canada that is useful that we don't see in a lot of places.

Senator Tannas: Where don't you see it that you're surprised?

Mr. McMillan: The U.S. for quite some time didn't have it. They have Currency Transaction Reporting, CTR, which is cash coming in or going out, but they didn't have the equivalent of that cross-border money transfer reporting.

Senator Tannas: Do they have it now?

Mr. McMillan: There's a lot of talk about it.

Senator Tannas: I guess if you're not comfortable, I understand. But we're looking at where the regulation needs to sit for this. We're being told it's the on-ramps and the off-ramps, which are the cash-in and cash-out points and that's squarely in your business. That will only work in a virtual environment if everybody's on-board for that. If all we do is move the cash in and cash out to another jurisdiction, that's a concern. Could you tell us the other countries that would be likely candidates that are not way-out-there countries? I mean, G20 countries where you think there's a risk that cash-in-cash-out without being tracked could set up shop?

Mr. McMillan: In the G20, I wouldn't suggest that any of those countries would be a weak spot where criminals would set up shop.

Senator Tannas: Are the top 20 countries, more or less, all kind of running things the same way?

Mr. McMillan: I think generally. I would say that all of them are engaged and reviewed by the FATF, which attempts to make sure that all countries come up to certain standards and I would say that they are all engaged in that process.

Senator Tannas: Thank you.

The Chair: Mr. McMillan, perhaps you could just expand for the committee. You represent MoneyGram. You indicated that MoneyGram's head office is in Dallas, but we also understand that you have 350,000 agent locations and that you operate in 200 countries. What is MoneyGram? In other words, do you own some of the agencies? Do you own your trading desk? What is MoneyGram?

Mr. McMillan: As an MSB, MoneyGram has built a network of relationships in practically every country in the world. We work with those agent locations to offer mainly money transfer services, person to person. There are stores that we own.

The Chair: Other than in the U.S.?

Mr. McMillan: There are agent locations in other countries that MoneyGram actually owns.

The Chair: I see.

Mr. McMillan: Generally, the relationships we have are with other agents. In Canada, for instance, we have a long-standing relationship with Canada Post. If you go to a Shoppers Drug Mart and want to send money, you go to the Canada Post desk and MoneyGram is what you will send. It's the connection of those 200 countries to that Shoppers Drug Mart that is offered to our consumers.

The Chair: That's very helpful.

The second thing I'd like to ask is: Do you report to FINTRAC as a money services business?

Mr. McMillan: Yes, we do.

The Chair: Could you share with the committee what experience you're prepared to make public that has involved terrorist financing or money laundering? I'm not asking for a specific indication but rather how prevalent is this in your business?

Mr. McMillan: We definitely report to FINTRAC. We know that some of our reports, as with other MSBs, have led to disclosures by FINTRAC to law enforcement that have resulted in information that got people arrested. I don't think I can comment on any specifics, but we do provide what we can as one piece of the puzzle that FINTRAC will put together to disclose to law enforcement.

The Chair: Do you file Suspicious Transaction Reports with FINTRAC as other institutions do?

Mr. McMillan: Yes, we file STRs with FINTRAC, definitely.

The Chair: Are there any further questions from senators?

Senator Massicotte: Your business is solely the transfer of cash. You don't do conversion or exchange of currencies.

Mr. McMillan: We're not a currency exchange business. When the agent in Canada accepts money, it's in Canadian dollars. And when we're paying out anywhere outside Canada, it's not. There's an element of a currency exchange, but it's a money transfer.

Senator Massicotte: You can't go in with Canadian dollars and come out with American dollars?

Mr. McMillan: No, that's not MoneyGram's business.

The Chair: You indicated your association with Canada Post in Canada. Would you have agencies other than Canada Post in Canada?

Mr. McMillan: Yes, we have other retail agent locations in different cities within Canada.

The Chair: Would you have storefront locations where MoneyGram is the sole operation? Is it usually included in other entities?

Mr. McMillan: It's in other entities. People with a storefront, like a Canada Post location, offer our services as well as their core business.

The Chair: Mr. McMillan, thank you very much for your appearance today. You've been very helpful in our deliberations.

Mr. McMillan: Great, my pleasure.

The Chair: In the second hour of this meeting of the Standing Senate Committee on Banking, Trade and Commerce, it is my pleasure to welcome, from the Telfer School of Management at the University of Ottawa, Professor Samir Saadi. Professor Saadi holds a PhD in finance from Queen's University and has taught at Queen's, the Royal Military College and the University of Ontario Institute of Technology. His work has been published in leading peer-reviewed journals and he acts as a consultant for several companies and government agencies.

It is a pleasure to have you before our committee today, Professor Saadi. Perhaps you have an opening statement you would like to make and then we will ask some questions.

Samir Saadi, Assistant Professor, Telfer School of Management, University of Ottawa, as an individual: Good morning, Mr. Chair and honourable members of the committee. Thank you for inviting me here today to speak with you about virtual currencies. My name is Sam Saadi, as you mentioned, and I am an assistant professor of finance at the University of Ottawa, where I teach corporate finance at MBA and executive MBA programs.

The Chair: Could I ask you to go slower? The translators are having trouble keeping up with you.

Mr. Saadi: No problem.

I also conduct empirical research on mergers and acquisitions, corporate governance, market efficiency, initial public offerings and volatility modelling of financial time series.

As I mentioned, I conduct empirical research on mergers and acquisitions, IPOs, corporate governance, volatility modelling and market efficiency. My recent research is related to how social media affects investors' behaviour as well as corporate investment and financing decisions. I was recently involved in a joint project where we try to model the volatility of bitcoins and check their predictability.

There are about 20 crypto-currencies that are crowding the virtual currency scene right now, and they are rapidly evolving as a topic of interest for many stakeholders. The most prominent is bitcoin that has been on the market since 2009. It is created through a mining process with every transaction saved in the block chain.

If you think about it, virtual currencies and online payments are not new. They've been around for decades now. What makes bitcoin or other crypto-currencies special is that they are 100 per cent decentralized, peer-to-peer networks that allow for proof and transfer of ownership of virtual currencies without the need for an intermediary.

Bitcoin is a disruptive technology that raises both hopes and fears in the minds of consumers, businesses, investors, charities and regulators. In fact, there are several advantages that virtual currencies could offer to different stakeholders and to the wider economy as a method of payment. Moreover, the distributed ledger technology that supports these virtual currencies has significant potential for innovative applications of this technology across financial services and beyond.

At the same time, however, virtual currencies present some existing and potential risks that could harm consumers, financial systems and even national security, which is now a very important matter, especially for Canada, when we face the threat of terrorism like never before.

It's not surprising that several countries, including Canada, are trying to introduce some regulations aimed at creating a hostile environment for illicit users of digital currencies, while at the same time of course providing a supportive environment for their legitimate use to flourish. As Tom Carper, the Homeland Security Committee's chairman in the U.S., puts it:

Rather than play "whack-a-mole" with the latest website, currency, or other method criminals are using . . . we need to develop thoughtful, nimble and sensible . . . policies that protect the public without stifling innovation and economic growth.

Despite its significant potential, virtual currencies have so far been adopted by only a relatively small number of consumers and businesses worldwide. This is due to several factors, including the lack of a regulatory framework that is needed to enhance the credibility and legitimacy of digital currencies. This lack of a regulatory framework continues actually to cause some uncertainty for businesses.

Another factor is the excessive volatility of their value, particularly bitcoin. Investors who believed in bitcoin when it first emerged made millions of dollars in the beginning, but investors who invested later on lost millions of dollars because the value of bitcoin crashed.

Bitcoin's volatility proved to be a double-edged sword for investors. That same volatility in the dollar-to-bitcoin exchange rate was frequently affected by negative media coverage on arrests related to illicit financial activities and by the security problems that led to different breaches. There are lots of examples; I'm sure you know.

Businesses that are investing in bitcoin are also finding difficulties in opening bank accounts, as some banks, some countries, are still treating virtual currencies or digital currencies as fraudulent.

Besides the negative media coverage, there are other factors that can explain the high volatility of bitcoin. For instance, the technology they use in this platform and this industry, the community of bitcoins or digital currency, is still in the beginning stages. Large trades of bitcoins can have significant impacts on the exchange rate.

In addition, many investors do not know what bitcoins are or what digital currency is and how it works. This gives rise to lots of noise trading. We see this even in the normal stock exchange. Noise trading usually induces a lot of volatility. We see lots of trading not related to fundamentals, just based on noise.

On the good side, however, virtual currencies have witnessed the emergence of private funds and alternative virtual currency investment. Amongst many things, the creation of hedge funds that encompass strategic trading on virtual currency volatility has become a trend now. So there's creation of new funds to make money based on the volatility of this digital currency.

On February 25, 2015, the New York Stock Exchange announced its investment in the U.S.-based bitcoin exchange and wallet service, Coinbase. Coinbase Exchange is now the first regulated bitcoin exchange that provides what seems to be a reliable and secure platform for bitcoin trading, and this is also backed by the New York Stock Exchange.

Last Tuesday, Noble Markets, a platform for trading bitcoins, announced that it is adopting the same software used by major securities exchanges, and this is provided by NASDAQ group. Many analysts see the embracing of bitcoin by the New York Stock Exchange and NASDAQ, which are the biggest U.S. exchange operators, as a sign that digital currency is coming up from underground and is here to stay.

Thank you, Mr. Chair and honourable members of the committee. I look forward to your questions.

The Chair: Thank you, professor.

If I may start on the premise that one of the requirements of the currency is to maintain a store of value. You've talked about the tremendous volatility of the price of bitcoin. Are you suggesting it's through regulation that that volatility is going to be removed? Would you accept, firstly, that for a currency to be successful, it has to maintain some value?

Mr. Saadi: Yes, I agree. I agree that it's very important to keep the value; otherwise they would be including a lot of volatility, people losing money, investors trying to leave this industry.

The problem, for example, with bitcoin is the lack of regulation. That's a major problem. The bitcoin community, from what I read, is looking for regulations to legitimize their business. So if you regulate it, you give more legitimacy and credentials. That leads to more confidence from consumers, investors and businesses. That's probably what reduces the volatility in the long run, because regulation is only one factor. But when you introduce regulations, in the long run there will be more and more users of bitcoins, so the volume will go up and this will stabilize the volatility in the long run.

Talking about volatility — I don't know; maybe you will ask me these questions — I'm honestly surprised that people are surprised that bitcoin is volatile. This was only created in 2009. If you think about IPOs, initial public offerings, when private companies go public, although sometimes we know lots of information about these private firms, still the market is volatile for the first day, first week, even up to six months.

So we should not be surprised about bitcoin being volatile. If you think about it, in the beginning, 2013 to 2014, it was really volatile. Then, if you look at the graphs, it's becoming more stable. The volatility went down substantially.

Coming back to your question, regulation is actually what they're looking for — but not too much regulation, because if you put too much regulation, that leads to an increase in terms of cost of compliance. This leads to a higher cost for them, and this is a growing industry. So if you put too much regulation, it will actually hamper the growth. They're looking for places, a country where they can grow, so they can easily move to other countries where the regulation is friendlier.

The Chair: Thank you, professor.

Senator Tkachuk: Thank you very much. On the question of regulation, specifically, what advice would you provide to us and to the Canadian government to provide incentive for the growth and widespread use of bitcoin and also to establish some faith in the marketplace for the use of bitcoin? So it's not only the bitcoin producers that would be happy, but the consumers themselves would be more comfortable using it.

Mr. Saadi: In terms of regulation, they want to be recognized. At the same time, you allow for growth and encourage growth and innovative use of this kind of technology or currency. There are two things here: There's the currency itself and the technology used, which is very innovative.

At the same time, you protect consumers. I think there's a lot of opportunity here. For example, you can protect consumers because there's lots of risk there and many people are scared. They think it's a scam. I'm using social media to study other effects, and one of the things we looked at is how people talk on social media about bitcoins. Many actually think it's a scam, a Ponzi scheme.

In terms of protecting the consumers, it's better not to introduce regulations. Honestly, if you think about it, the risks are not huge. The community itself is trying to come up with new technologies and a system to protect consumers from fraud. So the system is actually trying to protect itself.

But what you can provide when it comes to protecting consumers, instead of regulation, is to come up with best practice standards that can be followed without imposing regulations on the bitcoin community. That's how I see it.

Senator Tkachuk: Give me an example.

Mr. Saadi: An example would be to allow a consumer to get his or her money back, get refunded. I know that so far it's difficult for transactions to be tracked, and also to get your money back, but the bitcoin community is looking at this issue. It's possible to know who the consumer is and to know who the buyer is as well. You can investigate and get this information. The problem now is that it's not possible for the government to intervene and reverse the transactions, but maybe the government can introduce legislation where they can reverse the transaction and know the identity of both. However, one thing that attracts people to this currency is the anonymity.

There's still a debate, to be honest, about whether or not it's possible. But according to the experts coming up with this technology, it's possible to identify the customer and the suppliers. The suggestion is that the government be allowed or have the capability to reverse the transactions and identify the two parties. This way, we can protect the consumers and also protect the buyer as well.

Senator Tkachuk: So what you're saying is if I was buying something online, so I buy clothing, for example, or something like that, or sportswear or skis, so if I buy it online and they accept bitcoin and I pay with bitcoin, but I never receive it — it's a false website; they don't really have skis — so I lose the bitcoin, how would you protect that? Would you regulate to the point where people would have to be judged in some way, whether the Better Business Bureau or Chamber of Commerce, as being a legitimate supplier of the product they're advertising? In other words, some stamp of approval, is that what you're looking at?

Mr. Saadi: Yes. The digital currency platform — for example, eBay, when you try to buy from eBay, you can tell whether or not it's good to deal with that person or that entity. You can do the same thing, I think, with digital currencies.

The problem here, if the buyer is from Canada, and the supposed-to-be-company or person is somewhere else, in Afghanistan, how can you regulate that? One of the things to do to save a lot of time and of money is to have international regulations for all countries dealing with bitcoin. I know it looks like a very big task, but instead of every country having its own jurisdiction, why not have an international jurisdiction in terms of dealing with the same issues?

Because it is the same type of technology, why not come up with the same type of coherent jurisdictions that can help protect everybody else? That's one thing to do. Because you can protect consumers in Canada, but probably you cannot protect consumers —

Senator Tkachuk: Can you protect them when using regular currency?

Mr. Saadi: That's right, exactly.

Senator Tkachuk: But at the same time, if the person can accept Visa and uses Visa and transacts Visa, maybe somebody has recognized them somewhere.

Mr. Saadi: That's right.

Senator Tkachuk: That may be a way. In Canada, what can I buy with bitcoin?

Mr. Saadi: Honestly, I never bought anything with bitcoin.

Senator Tkachuk: Neither have I, outside of our chairman buying bitcoin. I don't know what I can buy with bitcoin.

Mr. Saadi: Honestly, I was thinking about buying bitcoin to make money, to be honest, trading on bitcoin. I have never bought anything with bitcoins. But just looking yesterday at the trading, I'm not suggesting that you buy now, but it's not a bad idea to buy bitcoins now. I'm not giving you advice. I was just talking to my wife yesterday to buy now. If you look at the long run, it looks like it will be going through the roof in terms of value.

Senator Tkachuk: Is it a currency or a commodity?

Mr. Saadi: It's both.

Senator Tkachuk: It can be both?

Mr. Saadi: It can be both.

Senator Tkachuk: Like gold.

Mr. Saadi: Yes, it can be both. Actually, it's even better than gold. If you look at the volatility even now —

Senator Campbell: You're feeling better, chair?

Senator Tkachuk: You're feeling better. You go buy some more. Double down.

Mr. Saadi: Look at storing gold. It's dangerous if you store it at home, the cost and the security and everything. Currencies can be stored online to be secure.

Talking about gold, now the volatility of the bitcoin is less or close to the volatility of gold right now. It's interesting how it is converging. But it could be going up again.

I keep talking about volatility because that's what I'm working on now. It's not clear whether people are trading based on information or just speculation. That's the problem for investors or consumers in terms of value, because it affects the value directly. It's not clear.

Senator Tkachuk: What I'm getting at, though, if you can't buy anything with it, what value does it have?

Mr. Saadi: I don't know. Like I said, I never bought anything with it, but I'm sure you can buy a lot of things with it. I remember reading an article about a lady in Afghanistan using the bitcoins, they allow you to buy computers and stuff like that, not get currency in exchange, but you get other goods online.

Senator Massicotte: I wanted to get on the mike, chair, because I want to warn you, the only people listening to this program are our mothers-in-law and our older parents, and I don't want them to buy bitcoins. Mother, don't buy bitcoins. I want to correct that.

Having said that, your suggestion is there would be legislation that can reverse the transaction, but that could only work if the service provider has all that information because it's all anonymous. For that to be effective, they would have to accumulate information constantly on every major user. If you're going to do that, you've just resolved the major issue where you know the players.

Mr. Saadi: I think the buyer or sellers or the block chain do have information about who is involved in the transaction. This is what I understand. They do have information about that. But they can also enforce it. If you introduce the legislation, they ask them, okay, you only allow those who have IDs and they provide you with all the ID information, address, but I know that it's possible to go around it and come up with different IDs.

Senator Massicotte: Your understanding is that they currently get all that information on every transaction?

Mr. Saadi: Exactly. It should not be public, of course, but if it's needed, they can use it.

Senator Massicotte: That's contrary to my understanding. Are you saying they should get that information for every transaction no matter what the amount is? Or if I buy a bitcoin and I buy a pack of gum, do I have to give information? Where do you stop and start?

Mr. Saadi: It's a good point because in terms of cost, but say, for example, today you buy chewing gum and then one month or a year later you buy a bigger thing, probably you don't need to — I don't know. To be honest, I got your point, in terms of buying small things; it's not a big thing. Maybe it's a good thing. The moment you try to buy a big thing they build a file about you. That's a good point, the trigger.

Senator Massicotte: What's a big thing to you? What dollar amount?

Mr. Saadi: It depends on the country. If you go to Afghanistan —

Senator Massicotte: How about Canada?

Mr. Saadi: If you think about average consumers, it's difficult to predict because if we look in terms of salaries, in Canada, the average salary is $43,000 or $47,000. I don't know. Probably it could be just giving 10 per cent of his wealth, or something like that, or 5 per cent of his monthly salary, something like that. Honestly, this has to be studied.

Senator Massicotte: Obviously the whole objective of that exercise is to make sure there is no fraud and no exaggeration. But some of these guys say that you're getting mixed up between the mechanical side, the block chain side, which is a phenomenal form of technology, and the users. They say to look at HSBC. They just got fined over $1 billion. They have all that information, highly reputable, supposedly so, so maybe just bad people. Maybe you shouldn't concentrate on that so much, getting all the additional controls and information because even our banking system has proven to have those same fraudulent practices. How do you respond to that?

Mr. Saadi: Could you rephrase your question?

Senator Massicotte: You're basically suggesting we put all these controls in place to make sure nobody gets defrauded out of their money. And yet within our banking system there are immense controls and know-the-client-type regulations. HSBC is a good example, where they've constantly abused that system internationally, even in spite of international agreements.

Mr. Saadi: There has been fraud for a long time, and there will continue to be fraud activity for a long time ahead of us. The legislation or regulation is to protect the consumers and protect us now, if you think about not only fraud but terrorism, so trying to protect the whole country, only you cannot make it zero. Impossible. Like when trading on the stock market, no matter what you do, you cannot make it zero. You can minimize it. That's what you have to do. That's your job is to minimize the risk of fraud. I think everybody knows that it cannot be zero. Even talking about corporate governance, CEOs, for example, always find ways to make frauds through compensation, no matter what, and sometimes —

Senator Massicotte: All CEOs?

Mr. Saadi: No, not all of them. Some of them.

Senator Massicotte: A large part?

Mr. Saadi: Most of them are actually hard-working and honest people. For example, stock option backdating. I am sure you have all heard of that. No matter what you come up with in legislation, they always come up with different things. The funny thing is that backdating was actually proposed by a lawyer. A lawyer is supposed to do the opposite thing.

What I'm saying is that there will always be fraud, no matter what technology we use, bitcoin or new technology. It's not necessarily bitcoin that is going to live forever. Some new technology will come up. What I'm saying is there will always be ways for fraud. There will always be a window. These people are probably working so hard. Tax evasion, we all face this. For example, in Greece you see it. In Canada as well, we have this problem. They always find ways to defraud the system and engage in fraud. You cannot make it zero. That's what I'm saying. At least, minimize it.

Senator Massicotte: This is interesting. I won't go any further.

[Translation]

Senator Bellemare: Thank you for being here. You talked a lot about bitcoin volatility. Correct me if I am wrong, but you seem to be saying that the more bitcoin is used, the less volatile it will be. But you said regulations were needed in order to bring down its volatility. In other words, a regulatory framework is necessary to encourage people to use bitcoin, resulting in a stand-alone system that would regulate bitcoin fluctuations.

A lot of people have asked us to regulate cryptocurrency, and some of them stressed the importance of not over-regulating but, rather, regulating just enough. People were also in favour of regulating businesses that convert cryptocurrencies into legal tender, or Canadian currency.

What is your take on regulating businesses that exchange bitcoin into Canadian currency, for instance, and staying out of bitcoin exchange transactions? Basically, the transactions wouldn't be regulated, similar to Canadian currency exchange transactions. In the case of cash, the transactions aren't regulated.

[English]

Mr. Saadi: Those who exchange bitcoin and currency are basically operating like banks. In any place in the world, banks have to be regulated. Actually, one of the most heavily-regulated sectors is banks. Think about it as a virtual bank. You probably don't want someone running a bank in his garage with no supervision. So I think regulating those exchanging money with bitcoins is important.

[Translation]

Senator Bellemare: Would that be enough?

[English]

Mr. Saadi: I like the idea of introducing a regulation only when it is needed. It is good to prevent — vaccines prevent disease and stuff like that — but especially when dealing with a market, not trying to discourage an industry that is growing, only when the threat is there. It has to come from a consumer or some people complain about it, and then you can react very quickly before it gets larger. That's my philosophy: Only introduce when it is needed.

[Translation]

Senator Bellemare: Use the necessity principle.

Mr. Saadi: Precisely.

Senator Bellemare: You said that bitcoin and cryptocurrency were here to stay.

Mr. Saadi: Yes.

Senator Bellemare: In your view, how will this system solve the inherent increase in transaction costs? Now, transactions are validated by miners, who are paid in bitcoin, and as we all know, the supply of bitcoin units is limited to 21 million. At some point, it is going to be necessary to introduce transaction fees.

Don't you think those fees will automatically curb the use of bitcoin, or do you see another solution to the problem? And if so, what is it?

[English]

Mr. Saadi: It's true on the long run. Now they are getting a bitcoin exchange. You can, for example, offer some commission, if you want. Now you have the options to offer commission if you want. But in the long run, it's true. Bitcoins need to be paid by commissions, and this will increase fees. This will increase the costs. I agree.

If you think about it, if you compare it with other systems, if you introduce some costs, it's still much cheaper than, for example, Western Union, which is 9 per cent, and other credit cards are making $250 billion a year.

I'm not a high-tech or IT person, but I think that with the development of computing powers, the cost will go down. Maybe it will go up now, but in the long run I think the cost will go down. This is my opinion.

[Translation]

Senator Bellemare: My next question is quite theoretical, but since you're a university professor, I'm going to ask it. Given the development potential of the 20 or so cryptocurrencies you mentioned, do you think it could have an impact on a country's monetary policy? In other words, could it affect a country's ability to influence the cost of credit and the money supply?

[English]

Mr. Saadi: This is now the nightmare of government and central banks. It's not really a threat because the volume is so low compared to the whole economy, but in the long run, it's true, they can.

You know, I would like to see it this way. It doesn't have to be black or white where they will either perish, these currencies, or they will dominate. It can be something parallel. If you want to use fiat money, you can. If you think you have an advantage for businesses, for example, exporting and stuff like that, they will have lots of advantage with this kind of money with low transactions. It has an advantage, even in terms of reducing the cost for consumers. When there is competition, then we will see that the costs will go down. I would say this money is going to be another parallel system and not necessarily replace the existing system.

If you think about 100 or 50 years ago and trying to go back and explain to some individual, having a time machine, going back and talking to people about today's world, they would think I am crazy. What are you talking about? What is the Internet? What does it do? It's difficult to predict the future. Can we predict the future? We can't. We have to deal with the problems as they come up. I lost my thought, sorry. This is how I see it. It could be a parallel system that will not harm the economy.

Notice that bitcoin and the digital currency came after the 2008 crisis. It is phenomenal how people are trying to accept this. We feel some of the people lost faith in the system, and this system has lots of problems that we are trying to fix. It's a very confusing world. We have the threat of terrorism, and technology is so innovative now. Comparing myself to my students, younger students, I cannot keep up with the technology. I am barely keeping up, trying to adjust myself to it.

I think that 50 years from now it will be a totally different world. We have smart people who are trying to deal with this problem. I don't think, honestly, that it is a threat. We should not hamper innovation because of our fear. This is how I see it. We just let it go, you know. It will flow. The market has a system to correct itself.

Senator Greene: I have a small question. Actually, it's a request. I was very interested to hear what you said about volatility and the fact that bitcoin is not as volatile when you compare it to other new things. The reputation of bitcoin is that it is volatile and it's not a good place for money, et cetera. That was something new for me. I think that our report ought to have a discussion about volatility, so I'm wondering if you have any more information or charts that you could send to the clerk that would express that view.

Mr. Saadi: Okay. I'm working on it now. We collected the data. We produced some preliminary results. I can send that to you when I have the full study. I can send it to you with some explanation, or I can send you the full study with all the details. I would be glad to share this with you, definitely.

Senator Greene: Thank you.

Mr. Saadi: To be honest, I have other studies on media coverage and how media can affect consumer behaviour and decisions. A lot of the bad reputation comes from the media. If you look at the fraud, it's not really huge relative to the whole bitcoin system, but only bad news sells, right? If you look on the Internet —

Senator Greene: We know that.

Mr. Saadi: Yes. So that's probably over-reaction and people are building on this bad news. We know, for example, in finance, in the stock market, people are biased in terms of reacting to bad news. Honestly, think about it. Even us, when there is some good news, we spend only a few hours being happy on that day, but if it's bad news, we spend the whole week thinking about it. The markets always react in terms of magnitude, much higher to negative news than positive news, and this is normal.

It's funny with bitcoins. Usually we see the curve of stock return to be more tilted to the right with some extreme negative returns. Here, if you look at the graph, the initial results we have, it's exactly like a beautiful bell curve with extreme good and extreme bad. It's more symmetrical. This is fascinating, because there's a lot of hope there.

I'm not saying bitcoin will necessarily survive. Maybe a new currency comes and replaces it, or new technology. If you look at professionals in the finance world, like the New York Stock Exchange and NASDAQ — these are not average people; they are professionals — they see a lot of potential there. They are not necessarily right, but at least it looks like there is something there.

Senator Greene: Great. Thanks.

Senator Ringuette: I have a small but a very important question.

Mr. Saadi: Yes, of course.

Senator Ringuette: Should the Bank of Canada develop its own Canadian crypto-currency?

Mr. Saadi: They are already thinking of having Canadian dollars electronically, maybe competing with the private sector. I don't know if it's good idea or not.

Senator Ringuette: But wouldn't it provide the consumer security aspect that you're looking for, and so are we with this study?

Mr. Saadi: Yes. You know why I'm saying that? Because maybe if this private thing will fail, it may not be a big impact, but if the Government of Canada invests a lot of money or invests a lot of resources and replaces it and it will not work, I think it will affect the whole economy. Usually, government should not be a risk taker. I encourage that personally, but I think we have to give it more time to see how things are evolving and then consider that. There are many things at stake if you think of it. This is the Bank of Canada. This represents the whole economy. You can probably do it on a small scale, I don't know, but full-fledged, I don't encourage that. That's my view. I'm not really a risk taker.

Senator Ringuette: But it would only be a digital version of the physical Canadian dollar.

Mr. Saadi: I think they are already considering that. I don't think it's a bad idea for the Canadian dollar. Beside the Canadian dollar, coming up with other currency like bitcoin or electronic things, this is — sorry, I thought maybe you were thinking that way. Yes, for Canadian dollars I don't think it would be a problem. Sorry, I was thinking of other currency, like bitcoin or litecoins, yes.

The Chair: Professor Saadi, thank you very much for your appearance before us today. You have been very helpful in our deliberations, and I express the great appreciation of the Senate Banking Committee.

Mr. Saadi: Thank you all for inviting me. It was a pleasure to be here.

The Chair: Thank you. This meeting is concluded.

(The committee adjourned.)