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

Issue No. 45 - Evidence - September 26, 2018

OTTAWA, Wednesday, September 26, 2018

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:16 p.m. to study the present state of the domestic and international financial system (topic: Digital Currency: Update and Review.)

Senator Douglas Black (Chair) in the chair.


The Chair: Good afternoon. Welcome to colleagues and members of the general public who might be following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce, either here in the room or listening via the Web.

My name is Doug Black and I chair this committee. I’m going to ask my colleagues around the table if they would please introduce themselves.

Senator Marwah: Sabi Marwah, Ontario.

Senator Wallin: Pamela Wallin from Saskatchewan.

Senator C. Deacon: Colin Deacon from Nova Scotia.


Senator Verner: Josée Verner from Quebec.


Senator Tannas: Scott Tannas from Alberta.


Senator Dagenais: Jean-Guy Dagenais from Quebec.


Senator Wetston: Howard Wetston, Ontario.

Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.

The Chair: As always, we’re ably assisted by our clerk and our analysts, who generally make us look better than we are, so thank you for that.

In June 2015, our committee released a report entitled Digital Currency: You Can’t Flip This Coin! The report made eight recommendations, including that the committee assess the appropriateness of the regulatory environment of digital currencies in the next three years.

Now we are here three years later, and I’m very pleased to welcome the Honourable Bill Morneau, P.C., M.P., Minister of Finance, before us today. Minister, we thank you, of course, for being with us, and we’re looking forward to the hour that we have with you.

I would imagine that you’ve had the opportunity to review the report that was done by this committee, and I know that we’re very much looking forward to your reaction to our recommendations and possibly an update. I understand that Mr. Stewart is with you as well and will be available to assist the committee as may be required.

Minister, thank you very much.


Hon. Bill Morneau, P.C., M.P., Minister of Finance: Thank you for this opportunity to appear before the committee today.

As you may know, I had a discussion with Senator Black last year about crypto-assets. At that time, I promised to make myself available to committee members to discuss this important issue, and I am pleased to be here this afternoon to do so.


There are a few things I hope to be able to accomplish in my remarks today. Specifically, I’d like to provide the committee with an overview of crypto-assets; discuss the four main issues they’re raising for governments across the globe; provide an update on the ongoing work that Canada is involved with to address crypto-assets; and, finally, highlight how we intend to continue to work to manage crypto-assets in a way that ensures the continued stability, utility and efficiency of the Canadian financial system.

Before I get into those specifics, though, I’d like to provide the committee with a brief update about our government’s work as it relates to the economy overall.

Our government believes that every Canadian should have a real and fair chance to succeed, and we’re working hard to make sure that this is a reality for more and more people, not only because it’s the right thing to do but because we believe it’s the smart thing to do. Our continued prosperity as a nation depends on it. We need the hard work and creativity of all Canadians, women and men and people of different ages with different experiences and abilities, in order to face the challenges that lie ahead.


Our government makes sure that more and more people benefit from Canada’s strong economic growth. One of the best ways of doing that is by creating more well-paid jobs for the middle class and those working hard to join it.

The evidence is clear that our plan is working. With their hard work over the past three years, Canadians have created close to 540,000 full-time jobs, bringing the national unemployment rate down to nearly the lowest in 40 years. The percentage of Canadians of working age is the highest in Canadian history. Further, 2018 has so far seen the strongest wage growth for Canadians in a decade.

Since 2016, Canada has led G7 countries in economic growth. Contrary to what the alarmists argue in their opinion pieces, business investment is on the rise. Since the end of 2016, business investment has increased by 8 per cent on average, which is the fastest rate of growth in the past six years. Mr. Chair, these results are good for our economy and good for Canadians.


It’s important that people feel that the benefits of growth are shared. It’s important that families feel confident about the future. And it’s critically important that Canadians have confidence in our financial system and that it remains strong, resilient and efficient. That’s where crypto-assets come in.

I’d like to start with a couple of definitions so that we’re all on the same page. Formally, crypto-assets are a widely developing class of digital assets that use distributed ledger technology to authenticate and record transactions. While many refer to bitcoin and other crypto-assets as currency, the vast majority of central banks and regulators, including the Bank of Canada and the Canada Revenue Agency, don’t view them as such. That’s because they can’t be easily spent and because their value is not reliable. It’s volatile and highly speculative.

Though there are many terms used interchangeably, the term “crypto-assets” is generally what’s used in G20 communications, and most G20 countries consider crypto-assets to be securities, not currency. The concept of crypto-assets and the core technology that underpins them have existed in some form for close to 20 years. While crypto-assets are not new, their volatility and the issues that arise from widespread adoption are new, as is the underlying technology, which is constantly evolving.

This has attracted the attention of regulators across the globe, who have become seized with the question of how to regulate these assets in a balanced manner, mitigating the risk involved without stifling the innovation that they offer.

Financial regulators face a number of challenges. Crypto-assets are cross-border by nature and virtual by definition. The world’s financial systems are highly integrated, and it’s easy for sophisticated users of crypto-assets to adapt their practices, whether for initial coin offerings or subsequent exchanges, to avoid regulation. As you can appreciate, Mr. Chair, these are global challenges which require a global response.

Accordingly, this has been a prominent topic in a number of forums, including the Financial Stability Board and the G7 and G20 tables, where I’ve been involved in leading discussions on crypto-assets and the challenges they present. What’s emerged from these discussions is that governments are focused on four key challenges: the use of crypto-assets to launder money or to finance terrorist activities; the absence of investor and consumer protections; the use of these assets to evade or avoid taxes; and, finally, their potential impact on the integrity of the market.

I’d like to speak in detail about what the Department of Finance Canada is doing to address each of these, but I’d like to emphasize that issues pertaining to crypto-assets transcend the sole domain of the Department of Finance. Given that most crypto-assets are classified as securities in Canada, the regulation and associated investor and consumer protections fall mainly within the jurisdictions of provinces and territories in our country.

Other federal agencies, including the Canada Revenue Agency and the Bank of Canada, are also playing roles in assessing their potential use to avoid taxes and their impact on the integrity of the market.


As to the measures adopted during my mandate, the government has reacted to risks with regulations, cooperation and coordination. It has amended regulations to more effectively address the illegal use of crypto-assets or digital currencies and to ensure compliance with international standards.

We are working with our provincial and territorial counterparts to ensure that adequate measures are implemented to protect consumers and investors as regards crypto-assets classified as securities. We are also working with our international partners by sharing best practices in addressing the risks related to crypto-assets.


Going back to those four key challenges, I’d like to start by talking about what’s being done to address money laundering and terrorist financing because this is the space where the risk arising from crypto-assets is most pronounced. Because they operate outside traditional payment systems, crypto-assets are inherently vulnerable to money laundering and terrorist financing. Their increased levels of anonymity, transferability and accessibility make them attractive to those engaged in organized criminal behaviour, and they are definitely being used in that fashion.

Increasingly, crypto-assets are being used to launder proceeds of crime, finance illicit activities and evade sanctions. The most prominent case of this is the darknet marketplace Silk Road, which was estimated to have conducted $1.2 billion worth of transactions in illegal goods before being shut down.

On this front, the Department of Finance, working with Justice Canada, has proposed regulatory changes to Canada’s anti-money laundering and anti-terrorist financing regulations to strengthen Canada’s regime and align it more closely with international standards. These regulations were published in the Canada Gazette for consultation from June to September of this year.

Once these new regulations come into force, they will apply to dealers in virtual currency and crypto-assets, and not the people in businesses who use virtual currency and crypto-assets as a form of payment. Dealers will be required to implement a full compliance program and register with the Canadian financial intelligence unit, the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC.

In addition, all financial institutions and other reporting entities that receive $10,000 or more in the form of deposits or payment will have record keeping and reporting obligations, bringing them in line with other financial transactions. These measures will serve to mitigate the risk of abuse of crypto-assets for illicit purposes.

We’ve also introduced foundational definitions in the regulations. We’ve defined “fiat currency” as currency issued by a country and designated as legal tender.

We also introduced a definition of “virtual currency” to mean digital currency that’s not legal tender but that can be converted into funds or another virtual currency. This approach will improve regulatory certainty around crypto-assets without regulating the underlying technology, in keeping with our goal of mitigating risk without stifling innovation.

This is an important policy driver, given that blockchain technology is oftentimes used to create crypto-assets and has other applications that could have benefits for both Canadians and Canadian businesses, including beyond the financial sector.

On the international front, this October, the Financial Action Task Force, an intergovernmental body, is expected to be one of the first standard-setting bodies to issue guidance about how its regulatory standards for combatting money laundering and terrorist financing should apply to crypto-assets across its member countries. This is a significant step forward. It will move the task force beyond simply monitoring the issue and will provide greater clarity for member countries.


As I said at the outset, a number of provincial, territorial and federal regulatory bodies play an important role in protecting investors and consumers. I will talk about part of what they have done in this regard to date, and I also encourage the committee to follow up with them directly.

While the first crypto-assets offered Canadians new ways of moving capital, their sudden growth gave rise to concerns about consumer and investor protection. We know, for instance, that some of the first crypto-assets were used to defraud inventors.

The International Monetary Fund has identified some of the key risks that these crypto-assets represent to consumers. These risks include an unproven infrastructure that is potentially unstable, unregulated intermediaries and service providers, and the inability to cancel transactions.

In Canada, the Financial Consumer Agency of Canada has published guidelines warning consumers about the possible risks of crypto-assets and the limited nature of the associated protection measures. The agency continues to monitor this issue to keep consumers informed about the potential risks.


The government is working closely with our provincial and territorial counterparts to strengthen coordination among regulatory stakeholders. Additionally, in August of last year, the Canadian Securities Administrators issued guidance indicating that many of the initial coin offerings observed to date are in effect securities. It encouraged companies considering these offerings to engage their local security regulation authority.

More recently, in June of this year, the CSA provided additional guidance on the applicability of securities laws to offerings of coins or tokens outlining specific situations. For example, if the tokens are not immediately delivered to purchasers, this could indicate that the crypto-asset is not yet available and purchasers are not buying the tokens for their immediate use. This purchase on the expectation of profit is akin to purchasing a security.

As I mentioned earlier, the use of crypto-assets to avoid taxes is another point of concern. Crypto-assets, their exchanges and their uses represent significant challenges for governments in terms of tax evasion and avoidance. Most G20 countries have determined that for the purpose of tax collection, crypto-assets are treated not as currency but as securities. Within Canada, responsibility for administering tax regulations rests with the CRA, the Canada Revenue Agency, which has issued guidance explaining that tax rules apply when crypto-assets are either used to pay for goods and services or bought and sold like a commodity.

Finally, the impact of crypto-assets on the integrity of the global financial system is a key concern for central banks, including the Bank of Canada. As I noted earlier, in recent years there’s been a rise in interest and speculation around crypto-assets. Many members of this committee will recall the spectacular rise and subsequent drop of bitcoin. Of course, bitcoin is just one of the crypto-assets available. In 2017, the issuance of new crypto-assets through initial coin offerings raised more than $6 billion, and close to $7 billion has been raised in just the first eight months of this year. As of March 2018, more than 1,600 variants of crypto-assets were available for purchase. While the market remains relatively small, crypto-assets have indeed raised significant interest, including within Canada, as both an investment and a new and innovative form of payment.

As an aside, where I go to buy my Financial Times magazine each Sunday morning, I get a question about crypto-assets every single Sunday morning from the woman who sells me the newspaper. As you would expect, this interest has resulted in a highly active and volatile market.

Canada has been playing a leadership role in the international community on this front. The Bank of Canada, along with the Department of Finance, has been co-leading efforts on crypto-assets and virtual currencies in international forums like the G7, the G20 and the international Financial Stability Board. For its part, the FSB has reviewed the financial stability implications of crypto-assets and concluded that based on market capitalization, crypto-assets are presently too small relative to other types of assets to pose systemic risks to global financial stability.

As a result, most G20 countries, including Canada, have been cautious regarding crypto-assets, monitoring opportunities and risks and assessing the need for multilateral responses. However, given the speculative nature of the market, regulatory intervention to date has been targeted. This is the approach we’re taking in Canada: responding in a measured way with targeted actions commensurate with what we see as the risk.

Crypto-assets present both opportunities and challenges to Canada, and it’s imperative that we recognize and respond to both. Consistent with this committee’s 2015 report and the work of the Financial Stability Board, we’ll continue to take necessary steps when it comes to regulation, steps that are proportionate to the risks observed in the marketplace.


We will also continue to work closely with our partners in Canada and elsewhere to assess the existing measures. We will also monitor market developments and regulatory trends in other jurisdictions.

In particular, we will continue to play a leadership role in the G7 and the G20 and will insist on strong international cooperation and a concerted response to these challenges, which do not stop at borders and require a truly global response.

Thank you once again for the invitation. I will now be pleased to answer your question.


The Chair: Minister, thank you very much for that comprehensive overview. I know there will be a number of questions for you. We will start with Senator Marwah.

Senator Marwah: Thank you, minister. That was very informative in terms of the steps that the government is taking. But one of the things that I always worry about is how do you regulate a space that is designed to be unregulated? The whole point of crypto-assets is that they’re designed to escape regulation.

I worry about the impending regulations they’re putting — though I’m glad to hear that the emphasis is on this as well and that they’re going to do global coordination on that front — on the requirements for tracking, such as FINTRAC, at $10,000. Is that going to be enough, or should we put in place much harsher regulations, such as banning certain currencies? I worry that reporting $10,000 or other transactions will create a reporting nightmare. I know how difficult it was to report cash transactions of $10,000, let alone bitcoin of $10,000. It creates a reporting nightmare.

Mr. Morneau: I think that’s a reasonable question. I think the challenge that we face in this area is developing. We need to be thinking about that developing challenge.

Our conclusions are that if we don’t take the approach that we’re taking — that is, if we don’t look at this issue like we’ve looked at other issues — we will be leaving a big space for people who are trying to evade or avoid taxes, as you know, or for people who are using these crypto-assets for nefarious purposes. I think our approach is consistent with other approaches being taken around the world. We don’t really see a response other than to find a way to gain a better handle on what’s actually going on, because if we don’t do that, we’ll leave ourselves vulnerable.

We will have to keep monitoring our approach over time to see the development of this. It’s a market that’s moving very quickly, so we will need to be responsive.

Senator Marwah: I’m not questioning that. I’m questioning whether it’s enough to really curb activity in the sector. Should we force them on exchanges? Should we force that every crypto-currency has to be in some kind of crypto exchange of some kind? They’ve started doing that in the U.S., but should we start doing that in Canada and take a much stronger, measured stance in terms of how we control this space?

Mr. Morneau: We should be thinking about how we work together with the other jurisdictions to have those discussions. The question of jurisdiction will be an important one. To the extent that we see these assets as securities, and that is the way we view them, they do fall into the jurisdiction of the provinces and territories.

That means there will be a need for us, because we have better information, to make sure that we are acting in a way that ensures that the other jurisdictions in the country get access to that information.

Maybe, Rob, you can comment on how we currently communicate to the provinces the information we get at G7, G20 and FSB tables.

Rob Stewart, Associate Deputy Minister and G7/G20 and Financial Stability Board Deputy for Canada, Department of Finance Canada: There are a number of fora in which we work with the provinces, in particular one that involves the Bank of Canada and the Canadian Securities Administrators, where we have had several discussions and an explicit agreement to track activity and the various issues associated with crypto-currency.

To the minister’s response, I would add that calibration of regulation is very important here. There is a question of the balance between innovation and illicit use, if you like. At this point, the judgment has not been that we need to, collectively or at an individual level, tighten the rules further than we have currently proposed to do in the anti-money laundering rules, which is the $10,000 floor.

Senator Wetston: Thank you for coming today, minister. This is an area that has a vast number of issues associated with it, obviously.

I’m quite optimistic about the current wave of innovation associated with distributed ledger technology. I know a lot of work has been done on that, including in Canada, and crypto-currencies, which I may be a little less optimistic about, whether it’s bitcoin, Ethereum or other currencies. We are making strides with respect to innovation in all those areas.

At the same time, I’m quite skeptical about the modus of many of today’s market participants, and extremely skeptical about the massive run-up evaluation of many of today’s crypto-currencies. What you were describing — that we want the innovation, we don’t want to impede innovation, but we want to have some framework around where this innovation can lead — you have been very helpful in describing what the government is doing and how you are engaged in these areas. That we don’t know how to describe crypto-currencies, and we have to say it’s a security and then regulate it, is an indication of some of the challenges.

We had the same problem with derivatives after the financial crisis, and we concluded that derivatives were not securities as well. You may recall that experience.

I can see you are engaged, and I can see the opportunity and that you are responding to the developments, but what is your sense of how you are going to create a framework around this area given the fact that, as you have described, it’s going to require a significant coordination both nationally and internationally? Can you provide more insight into that focus that I’m trying to speak to you about?

Mr. Morneau: Maybe I can provide you with confidence, but I’m not sure it would be more insightful than you already are on this issue, and obviously you have a background of pretty deep in thinking about these things.

To the extent that I can provide you with some confidence, this is a very active discussion at the G20 and G7 tables. I would say the primary focus of that discussion is around the anti-terrorist, anti-money laundering issue: It is of significant concern around the world that we are finding ourselves with a methodology that allows people to anonymously support those who would basically do Western society harm. That’s the focus of concern, especially at the G7 table, where we have had this discussion literally every time the G7 finance ministers and central bank governors get together.

The focus has been on trying to find ways we can work together because this is an area where we have no choice but to work together, thinking about the ways we can deal with this. It has included bringing some of the most sophisticated observers of this issue to the table. The Financial Stability Board has been very focused on the systemic risks issues, and as I mentioned in my remarks, the FSB has concluded that, as of yet, it’s not perceived as a systemic risk.

Going at it from that angle, critically important from our standpoint, the reason around the angle around securities is really observing that it’s not a currency more than anything else and choosing a taxation regime that makes sense based on the nature of what the vehicle is.

I would share some of your observations in terms of optimism around blockchain, including the things that we are seeing. I had an opportunity to meet with the president of Alibaba, which was interesting. He explained that one of the ways they use blockchain technology is in their lobster business, of all things. They use it with this distributed ledger approach to keep track of that business in multiple jurisdictions.

Today we saw that some banks are using it for payments separate from bitcoin. I share your optimism about the technology. And in terms of the motivations of those using it, we need to be very careful and watch closely to make sure that we capture those that are acting in an inappropriate way.

Senator Wetston: Illegally, possibly?

Mr. Morneau: Illegally in many ways. I’m sure there are many reasons why other people might consider using the technology, but in some cases people are very clearly doing it for bad reasons.

Senator Tkachuk: Thank you for your presentation, minister. In our report on digital currency, we concluded, among other things, that digital currencies and their technologies present a range of challenges, including greater opportunities for money laundering. We have since learned that money laundering in Canada is a far more significant problem than this committee had been led to believe.

We have had FINTRAC before us a number of times in this area, and not once did they tell us that there are significant problems at six of nine banks, especially when it comes to suspicious-transaction reporting.

In its public report in 2017 FINTRAC praised the efforts of Canada’s banks in this area. But there was another report that we weren’t told about that you were presented with, which was uncovered through an access-to-information request, and in it the problems with the banks were revealed. I’m going to quote to you what the media report said — but you would know this: “In examinations of the banking sector . . . 67 per cent were found to have significant levels of non-compliance,” says the report that was presented to you.

Even casinos did better than the banks, with 29 per cent non-compliance, and we all know what a problem some casinos have had with money laundering.

Mr. Morneau, every time we hear from FINTRAC, they tell us everything is rosy in these areas. This comes as a bit of a shock. Can you tell us why we didn’t hear any of this from FINTRAC officials when they testified before us? Why didn’t we hear it from officials at Finance? After all, you were the recipient of the report. And what are you going to do about it?

Mr. Morneau: Thank you for the question.

Senator Tkachuk: You are more than welcome.

Mr. Morneau: I can’t respond with any understanding of what transpired in your meeting with FINTRAC as I wasn’t there. I don’t have any awareness of what was or was not presented.

Senator Tkachuk: We were all there.

Mr. Morneau: I wasn’t, so I don’t have anything I can respond to on that. The report in question, of course, is a report on a very large volume of transactions, obviously because of the size of the banks. Many of them are technical in nature. It’s important to stay on top of these things and get these reports so that we can continue to monitor and make sure we are dealing appropriately with challenges in the banking sector. What we have in place is a system that allows us to see what’s coming through and also understand which of the issues are important for us to get right on and which are the ones we need to work on at a technical level to make sure that we get a higher level of compliance from the banks as they deal with a very large number of transactions.

Senator Tkachuk: Minister, I don’t know how to say this, but FINTRAC comes to us. You are responsible. They come to us and tell us that everything is rosy. Then we find out there was another report that was presented to you that said everything wasn’t rosy, that there were problems. And they weren’t minor problems. These were significant problems of non-compliance by the banks.

We never heard anything about it from FINTRAC, and we never heard anything about it from your department officials when they were here. We have to find out from the newspaper. There is something odd going on here. You can’t get away by saying you don’t know what they said. We all know what they said. They said everything was fine. But it wasn’t. How are you going to solve the problem?

Mr. Morneau: I would be happy to take another look at the report. If there are issues that you have specifically, if you’d like to get those to me, then I’ll be happy to respond.

In looking at the FINTRAC reporting, they are obviously trying to review a very large number of transactions. It’s important that we review those. It’s also important that we hold the banks to account for issues of concern. And I believe we are doing a good job in that regard.

Senator Tkachuk: When did you see the report that was not revealed to any of us, either through you or through FINTRAC? When did you see it?

Mr. Morneau: I’m not aware of the specific report you are talking about, so you’d have to provide it for me.

Senator Tkachuk: I’m going to pass.

The Chair: Thank you very much.

Senator Stewart Olsen: Thank you, minister, for your opening where you discussed the state of the economy. I want to discuss Canadian competitiveness with bitcoin and crypto-assets. When I and ordinary people like me hear “billions of dollars,” then it doesn’t seem to me that we are very far ahead on establishing a taxation system. Usually governments have never met a large amount of money that they don’t want to tax. We don’t seem to be there.

I would like to be assured that Canada is going to be competitive in this area and that we are on top. It’s a new emerging area that we need to be competitive on because we are losing foreign investment in this country, and that’s over the general revenues, pipelines, our oil, our resources. I’d like to hear from you. You say we are watching it carefully. But don’t you think we should perhaps be doing more than watching?

Mr. Morneau: I think there was a lot in that question, so maybe I can try to unpack it. In the first part of the question, you asked about Canadian competitiveness. It’s always important to think about where we are and where we want to get to. Where are we? We are in a position where our economy is doing well. We had the fastest growth among G7 countries last year in 2017. Our rate of unemployment is close to the lowest it has been since the mid-1970s. So more Canadians are working. We are seeing wage growth that is positive. The level of investment that you referenced is not declining; it’s increasing.

We had a change in the level of investment with the change in oil prices, but for six quarters now we have seen an average increase of 8 per cent. So it’s actually on the increase, not on the decrease. I’m not saying any of that to be complacent because we always need to think about where we are going in the future.

As I went out in the country this summer to talk about the challenges that Canadian businesses see in the future, I heard that their businesses are doing well; that they have a big challenge right now, not surprisingly, with ensuring they have the right kind of people in their business, because we have had lower unemployment, which relates to the challenge of getting people; and that they are concerned that we maintain the ability to make investments on a competitive basis. They are looking at the changes in U.S. tax rates and trying to evaluate how that changes their situation for businesses that have the potential for cross-border investment. That’s an important frame.

I do see the bitcoin issue as quite separate. The idea that we look at crypto-assets as a security relates to how we tax those. That means that if you buy a crypto-asset at $10 and it goes up to $100, you experience a gain of $90 on the sale of that asset. You experience a tax event when you do that sale. We are taxing those assets at present. So your question about whether we are losing something is actually inaccurate. We are, in fact, taxing capital gains on those assets as we do with other gains.

There is always a need to consider whether we need to update our understanding of a particular asset class, whether there was some dynamic that is changing it. That’s why it’s so important to have discussions like this. But at present, we are not losing something to the economy as a result of this area.

In terms of the size and the scope, I think you fairly pointed out that this has increased in size. But in terms of the context of the overall economy, it’s not that enormous as a function of our economy. The money we are talking about is in the context of a $2 trillion economy, so it’s important to put it in context. We need to monitor and make sure our systems stay up to date. In particular, we need to be concerned about potential challenges. These include money laundering and terrorism financing. These are significant risks not only to Canada but to the global economy. But I think we also need to have proportionality as we think about this issue.

Senator Stewart Olsen: To clarify, I may have misunderstood, but you said, “in choosing a taxation regime.” I took that to mean that we weren’t doing as much as perhaps we could in the future. Is that what you were saying?

Mr. Morneau: No. When we look at the nature of crypto-assets, we see them as having the kind of volatility, the kind of characteristics that we see in securities, which means we are taxing them in the same way as we would tax other assets that have those potential gains. That’s what I was referring to. That’s the approach we have chosen, which is, I believe, consistent with most other countries.

Rob, perhaps you can comment on that.

Mr. Stewart: To the best of my knowledge, that is the case. In most countries, these kinds of assets are considered commodities.

Senator Stewart Olsen: It was the words “in choosing” that I wondered about.

Senator Wallin: I want to follow up on that point, minister. We are at the stage of defining, regulating and taxing this as a security, but the value is quite high of this level of activity. I’ll put my question this way: What would be the trigger for the federal government, rather than handing it out to the provinces at this point to treat it as a security, what would be the trigger that would push it into your view where it became significant enough that you were treating it as a form of currency? You were laying out a very specific tax regime. Is there a dollar value you have in the back of your mind that would trigger that, or might it be some incident, like another terrorist attack, where we find out it has been funded through that mechanism? What takes us to the next step?

Mr. Morneau: I would look at those as two separate questions in a way. As you think about the size of the market, we obviously have a very significant capital market in this country, which is provincially regulated. Those assets, those securities are provincially regulated. That’s the jurisdiction issue in our country. As this becomes regulated to appropriately understand and make sure we have reporting on the assets and the purchase and sale of those assets, that would allow it to stay in that frame.

Separate and distinct is the different kind of risk that the anonymity of the technology brings into play. That is something we need to continue to watch carefully. We’re obviously putting regulations in place to require dealers, anybody dealing with these securities, to have reporting responsibilities so that we get a handle on them. If, in the hypothetical, a situation came up that meant that we needed to think about a different approach because of risks to the broader economy or risks potentially to our security, I think we would have to consider those at the time that it happened. But right now we’re trying to make regulation in order to reduce the challenges around the anonymity and ensure that we find ourselves in a place where we understand what’s going on.

Senator Wallin: Is it fair to say that you don’t yet see this as a legitimate form of currency?

Mr. Morneau: Absolutely. We don’t see this as having the characteristics of a currency at all. That is consistent with the perspective of other countries, and that is certainly the consistent perspective of G7 and G20 forums.


Senator Dagenais: Thank you for your presentation, sir.

In reading about crypto currencies, we note that they are a high-risk investment. There is no complaints process. In many cases, the supplier does not provide any assistance in recovering funds. There is no deposit insurance. If the supplier goes bankrupt, the funds are not protected.

Do you think Canadians are well enough informed about the high risk of using crypto currencies? Do you think that current legislation, if there is any, is strong enough to exercise control?

You talked about the G20 meetings. Are there agreements among the countries for greater monitoring of the use of crypto currencies?

Mr. Morneau: Those are definitely good questions. I am sure it is hard for Canadians to understand the crypto-asset market. I prefer the term “crypto-asset” as opposed to crypto currency. This continues to be a challenge. We have to assess the risks for consumers. With our regulations, we think we can improve the situation, but we have to continue discussions to make sure that people understand the situation properly. With other kinds of assets, we can always wonder whether people who buy them understand the risks properly. That is always a challenge, but it is a greater challenge when something new comes along.

At the G7 and G20 meetings, we discussed the risks related to terrorism and how we can work together to improve the situation. At the same time, we are looking at the risks to the entire system and to financial stability. We have to look at these things because the market is changing. For the time being, however, we do not consider there to be a risk to the whole system.

Senator Dagenais: You talked about economic performance and the low rate of unemployment. Those things represent the past, but you and I know that we really have to look to the future.

Mr. Morneau: We always have to look to the future. That is why I have listened to people across the country over the summer to see what we can do to maintain our competitiveness in the future.

From what I heard, the vast majority of companies are doing well, but there is some anxiety owing to global changes and tax changes in the United States. We are thinking about what we can do to attract investments to Canada in the future. That will be part of our reflections this fall.

Senator Dagenais: Thank you very much, sir.


Senator Tannas: Minister, the committee put forward eight recommendations, and I was happy to be part of the committee at that time. We tried to keep them tight and punchy, doable, not terribly difficult, such that they would be relatively easy to execute on.

I wanted to direct you to recommendations 5, 6 and 7. Recommendation 5 was that you, the Minister of Finance, convene a round table with stakeholders, including the banks, to look at solutions for businesses that were involved in crypto-currency and around the crypto-currency space, including those that just simply accept crypto-currency; there are difficulties getting banking arrangements, and the Canadian banks were unwilling to provide them with banking services. I’m wondering whether you convened the round table or decided not to.

Recommendation 6 is that the federal government, through its appropriate federal entities, provide concise information to the public about the risks of digital currencies. I’m wondering whether you decided to do that, and if so, could you provide us with whatever information from whatever agencies were done.

Recommendation 7 is that CRA make a specific effort to educate taxpayers about the obligations they would have to pay taxes. Did you decide to do something about that, and if so, could you provide us with the information?

Mr. Morneau: To start with, it’s always important to acknowledge that these are important things for us to be thinking about. You’ve put forth some recommendations that recognize some gaps, in particular around how Canadians understand the market. Obviously, it’s been pretty dynamic since this report came out. This market is changing, and so our intent in coming forth with regulations that we’ve been consulting on this summer was to consider the situation we’re in now as well as the recommendations of the Banking Committee. So that’s quite important.

We have not decided not to do any of these things. Some of these things are actually happening right now but may not be happening as fully as they need to happen. It’s a very fair point that we need to continue to provide information about the risks of digital currencies. We have been doing that through FinPay, but I think more can always be done in that regard. My anecdote about the woman who sells me my newspaper is absolutely true. Unfortunately, she didn’t take my advice all the time, and she lost some money when she bought some bitcoin. But I do think that people are anxious to have more information, and I do think, as well, that the tax obligations, which we’ve made an effort to get an understanding of out there, are not broadly understood.

I would hazard a guess that those who are actively trading are more likely to understand the tax consequences of their actions at this stage, so it’s more about potential new entrants to the market. I think it’s something we do need to continue to consider.

Finally, around the lack of access to banking services, Senator Tkachuk points out, I think correctly, that we need to stay very apprised of bank situations and, importantly, they will be risk-averse and should be risk-averse to get into markets where they have concerns that there can be money laundering or terrorist financing going on. So it may be they are acting in an inappropriately risk-averse manner.

But we will continue to look at these recommendations as we consider the impact. We’ve had a large number of responses to our regulations in our consultation period over the course of the summer. I think you probably know that it went until September 7, I believe. So we’ll now be responding to that in the near future.

Senator C. Deacon: Thank you, minister, for the presentation. I come from the start-up world, so I was really pleased to hear the distinction that you made, Mr. Stewart, between the innovative and the illicit use of crypto-assets. That really is the basis of my question.

I often work with a lot of young folks who are very sophisticated in their approach to any new tech innovation, and certainly we’ve worked hard in Canada to bring a lot of start-up visa immigrants to Canada. These new Canadians are phenomenally capable in their abilities. I’m aware of one situation in particular of a new Canadian who came and brought assets to the country using crypto-currencies and had those assets frozen quickly under a fraud investigation from a Canadian chartered bank. That had a punitive effect on this individual in his early months in Canada and it is still ongoing. It was really a lack of understanding at the chartered bank that caused this to occur. There is no evidence of anything nefarious. It was clear. He provided a strong paper trail in that regard.

I think there’s a risk that some of our perhaps more sophisticated young Canadians and others may be using these assets in a very legitimate manner. But an unsophisticated or perhaps less aware response by our chartered banks presents risks to them and a heavy hand that could be quite harmful at the wrong time. I know of this one particular situation where that was the case.

I wonder if you could provide advice as to how you’re working with the chartered banks to help them as they adjust to this new reality.

Mr. Morneau: I’ll ask Rob if he has anything further to say on this. What I would say is that we do need to exercise a certain degree of caution around people using these digital assets to move assets around the world. That appropriate level of caution needs to be exercised because there are very clear examples, many of which have been reported but some of which have not been reported, where they have been using the movement of these assets inappropriately. Over the last little while 70 investigations have been opened in Canada and the United States into this area. So it is real.

Of course, we always want to balance the legitimate use of this market with our concerns, and it may be the case that we have some pretty cautious banks because they’re concerned about this. It’s also important for us not to advocate for them to become lax in their standards in looking at movement of funds.

I’m not sure if we’ve done anything specifically around that issue. Rob, is there anything you’re aware of?

Mr. Stewart: I could perhaps add to this, minister. Maybe this will answer a couple of other points raised on the issue of frameworks.

May I say, senator, that the spirit of the committee’s report of 2015 has informed many of the things that we’ve done since; so whether there has been a specific event, I would characterize our activities as being more multiple and manifold than they are one-off.

We have an advisory committee at the Department of Finance called FinPay — the minister referred to it — which gives us advice. It’s a multi-stakeholder committee, and it tries to balance the issues of protection and innovation. This is additional to the work on the money laundering side. In it, we have looked at the challenges faced with protecting people and also encouraging innovation. We have discussed with them the challenges of regulating entities that we don’t normally regulate because we’re set up to regulate banks and they get the prescriptions of anti-money laundering. But we’re not particularly well set up to regulate fintechs that might be using blockchain or innovative payment methods. This committee helps us to look at those questions and helps us to think about a retail payment regime, for instance, that we might apply in the future, which would be a framework that would validate the way business is done through innovative technologies like crypto-assets and that would allow the banks to be assured that the risks are being monitored and would allow the entities that are undertaking that activity to be assured that the banks will support them.

The Chair: I think Senator Tkachuk has a quick supplementary question.

Senator Tkachuk: Mr. Stewart, on the report I was talking about and that I asked the minister about, he said he didn’t see it. Did you see that report that the newspapers were talking about regarding the non-compliance?

Mr. Morneau: I didn’t say I didn’t see it. I don’t know the date of the report or the name. I’m just not sure what it is you’re referring to, and I’m not sure I know what article you’re referring to. I just don’t have context for your question. I am just unable to answer without more context.

Senator Tkachuk: Okay. I’m not satisfied with the answer, but that’s fine. Go ahead.

The Chair: Thank you very much.

Minister, I believe you have to leave around 5:15, or have you more time for us?

Mr. Morneau: No, I want to say that I really appreciate being here. I had the opportunity last night, actually, to be at a function in New York. There was a Finovate function where Canadian financial technology firms were in New York for a broader conference, and they were out last evening. Senator Wallin might know where I was, because I was with the Consul General in New York. In that context, I can tell you it was a positive response from the fintech firms in thinking about Canada as a place where they want to do business, a place they can see that because of the nature of our banking system and the concentration of skills in and around Toronto, in particular, there’s an awful lot of opportunity for them to be developing. That provides us with some great opportunities, and it also gives us some really good expertise to think about some of the issues we’ve been thinking about at this table.

The Chair: That’s encouraging. Just so the committee understands, while the minister will have to go, Mr. Stewart and other officials will be available if we have further questions. I know Senator Wetston has a second-round question.

Minister, on the way out the door, there are two points I’d like to leave you with.

The first point is I’m very encouraged, as chairman, to hear that you recognize there’s a balance between innovation and regulation. That’s difficult. We acknowledge that, but I’m pleased to hear that you and your officials understand that point.

Following on what Senator Tannas has said as well, we’re encouraged that you’re mindful of our recommendations, and I’m glad to hear Mr. Stewart say that it is, if not top of mind, at least on your list of things to consult.

I would also refer you to recommendation 2, where we urged the Government of Canada to explore opportunities to use blockchain. Just as Walmart, apparently, and now RBC and, we learned yesterday, JP Morgan Chase are, I think there’s an opportunity for Canada to explore opportunities there as well, and recommendation 2 deals with that.

Changing gears, minister, we know we have the fall economic statement coming, and we know you will do tremendous things for our economy in that. Our committee has been studying this matter comprehensively for the last three months. We will be issuing a report on our findings from what people have told us and what we have concluded ourselves. I would hope that you will consider that, because we’re all endeavouring here to help the Canadian economy remain competitive and continue to grow over the next six or eight quarters.

Minister, thank you very much for being here. We are endeavouring to be of assistance to Canada.

Mr. Morneau: Thank you. I look forward to the report and, absolutely, we will be taking a look at the recommendations of this group, as we have been looking at recommendations from businesses and people across the country.

The Chair: Thank you very much, minister.

Senators, Mr. Stewart and some other officials will stay, if that is the will of the committee. Senator Wetston has a question.

Please let me introduce the panellists that are with us from the Department of Finance Canada. We’ve met Rob Stewart already, Director General. As well, we have Annette Ryan.

Ms. Ryan, I think you’ve been with us before, haven’t you? Lucky you.

Ms. Ryan is the Associate Assistant Deputy Minister, Financial Sector Policy Branch. We have Julien Brazeau, on this side — and you’ve been with us before as well, absolutely — Senior Director, Strategy and Coordination, Financial Institutions Division, Financial Sector Policy Branch. Your titles are mouthfuls. And Gabriel Ngo, Adviser, Financial Crimes Policy, Financial Sector Policy Branch.

Thank you for joining us. I don’t think you’re going to be here long, unless Senator Wetston has a very long, detailed and complicated question.

Senator Wetston: I’m glad to have this opportunity. I feel the regulatory framework required around this digital currency or the ecosystem associated with it is really critical. I want to remind you all, and you know this very well, what we came through 10 years ago with the financial crisis, with the failure to regulate in any significant way the derivative markets and the challenges we had in Canada with the $35 billion of risk at the ABCP crisis, the asset-backed commercial paper.

I simply wanted to get your point of view on the regulatory framework that may be required to avoid the buildup of risk or fraud or market manipulation or whatever we’re going to examine as a result of this. My discussion with some of the digital currency firms suggests they want a framework, they want to function in a legitimate environment. They don’t know what that is. As we work towards it in the fragmented framework that we have in Canada to address this issue, I implore you all to think about our experiences in the past and avoid the delay to put this framework in place to ensure that these businesses can function on a platform and have the regulatory audit, tracking, tracing and transparency necessary to avoid the kinds of things that we have experienced in the past in an OTC market, in a non-transparent market. That’s a bit of a mouthful. I understand that, chair. But I implore you to think about that and not delay in the development of this framework.

The Chair: That’s an important mouthful, Senator Wetston, actually. Who wants to take that on?

Mr. Stewart: If I may, a small correction. My title is Associate Deputy Minister.

The Chair: I beg your pardon. I called you Director General.

Mr. Stewart: I think you did. That was years ago, I’m sure.

Senator Wetston: I’m glad you put that on the record.

Mr. Stewart: I’m not sure I’m better off as a result of it.

The Chair: I assume you’re not.

Mr. Stewart: I’ll defer to my colleagues on some of the issues here, but I just wanted to say, Senator Wetston, that I think the financial crisis taught us all a lesson about regulatory lassitude or laxness. I think this case has been given greater scrutiny as a result of that. When I say “this case,” I mean the issue of crypto-assets and their various uses.

I think the judgment call at this point in time is that the scale of the activity at a market level has not come anywhere near the scale of the activity of derivatives or asset-backed commercial paper, for that matter, and therefore has not warranted a convulsive, heavy regulatory response. And we have been careful to try to balance that against the evolution of technology and the use of distributed ledger technology indeed in other contexts, as you well know. So we’re being careful about that. We’re being considerate about having a framework.

There is work under way to look at payments, in particular, and I referred to this earlier, in the context the business models evolving away from regulated institutions like banks and into entities that are technology firms or indeed other kinds of entities that just do payments on the side. All of that has warranted in our mind some action, which we are currently working on in terms of advice for this government about how to regulate in a more coherent way, involving the authorities that we currently possess at the federal level, the Bank of Canada, the Financial Consumer Agency of Canada, OSFI and FINTRAC.

I do think we feel that while we haven’t designed an overarching framework for crypto-assets per se, we are moving forward with the regulatory framework, which will capture in large measure activity that’s being undertaken using crypto-assets.

The Chair: Any other comments? Senator Wetston, do you have a follow-up to that?

Senator Wetston: No, that’s fine. Thank you very much.

Senator Tkachuk: I’m going to ask about that report, because the report was a FINTRAC report, and there’s a public report, but this was a private report, a confidential annual report. So it doesn’t just happen once in a while; it happens on a regular basis. Delivered to Finance Minister Morneau weeks earlier, that report looks at FINTRAC’s probes of nine banks in 2016-17. The September 30 document obtained by CBC News under the Access to Information Act found significant problems at six of the nine banks, including problems in providing FINTRAC with reports of suspicious transactions.

Does that ring a bell?

Annette Ryan, Associate Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: Senator, I’m happy to provide more information on this issue. You’re quite right factually on the issue. I would offer some context that the director of FINTRAC, Nada Semaan, presented at the House of Commons Finance Committee in recent testimony. I would offer that the report you speak of, the report to the minister, is intended to be a report from the director of FINTRAC to the minister that updates on administrative matters and so on, as a complement to the other cycle of annual reports.

The report in question delved into essentially technical assessments of how different sectors and entities were doing with their compliance. I would offer that the context for that year’s report was that FINTRAC is moving from an approach to their audits that is based on compliance and making sure that every report is filled out with every box completed in its entirety, to more of a means of working with the reporting entities that provide information to FINTRAC to focus on the effectiveness of the reports. So working with the entities so that they’re providing FINTRAC with information that can subsequently be turned into information for law enforcement or other competent authorities.

In that guise, given that FINTRAC was working to change the report to something that was more effective and geared towards getting bad actors, compliance issues increased in every sector during that year, as recorded in the minister’s report. I would direct you respectfully to Director Semaan’s testimony at the House of Commons, where she went into greater detail on essentially the nature of what constitutes significant compliance errors in the report to the minister, and she is on record as stating that they are more of an administrative nature. For example, if a report missed a field, a postal code or an element of a report was missing, that would garner attention through that former statistical method, which is subsequently being revised as well.

Senator Tkachuk: Did anybody get fined for non-compliance?

Ms. Ryan: That’s an excellent question, senator, and it goes to the fact that the compliance indicators used for that report were not sufficiently significant to garner the attention of an administrative monetary penalty or even necessarily relate to the existence of money laundering for those reports. So it was very much on the administrative practices seen in the audits, not the actual presence of money laundering.

Senator Tkachuk: If this was so insignificant, why would FINTRAC be reporting to us about how wonderful everything is and that there’s no problem, yet they did fine a bank in 2016, I believe, over a $1 million, right? Didn’t the government fine a bank for non-compliance?

Mr. Stewart: Absolutely. There was an administrative monetary penalty at that time for non-compliance. What I would underline is something Annette just said. You must distinguish between the prevalence of money laundering and the level of compliance that any individual among the 30,000 reporting entities has with FINTRAC. Compliance is just reporting to FINTRAC a set of information, which is subsequently distilled. FINTRAC is responsible for determining whether there are in fact transactions that should be reported to the appropriate authority, the RCMP. They are responsible for pursuing crimes that may be money laundering.

You are getting a very coherent story from the director. FINTRAC is finding that there is not an inordinate number of suspicious transactions being reported. It’s a relatively small number. It is rising. We do feel there are issues of money laundering. But compliance gets to more of the issue of check the box and whether it is an ongoing problem and the issues are high. We don’t want people to misunderstand that. When that bank was fined for non-compliance, we indeed experienced the problem of its reputation being affected. People perceive that as having been involved in money laundering, which is not something we would like to have happen to other banks. They should be fined if they don’t comply, but we don’t want people to think non-compliance means they are criminals.

Senator Tkachuk: I don’t think so either, but if you are not compliant, that means you are not reporting properly. How would you know what is going on at the bank if they are not reporting properly?

Mr. Stewart: FINTRAC is making an effort to move from compliance in the administrative, technical fashion to substantive compliance, which is one of the things they really need to know that will give them the indicators they need to pass on evidence of potential criminal activity. We are shifting over the last few years away from the regime that was in place, to which this report pertains, to a regime that is more substantively oriented.

Senator Tkachuk: The Banking Committee has always had the suspicion that reams of paper don’t help the situation, that banks themselves know when there is a suspicious transaction. You must be able to deal with the bank on the basis that if there is a suspicious transaction, usually a bank can figure it out pretty quickly. They know their customers. They know what’s going on. If someone brings in a bag of cash, they know there is a problem. I’m trying to be on your side. We would have less paper but more compliance is what I’m trying to get at. The minister should read the report

The Chair: This is a very good line of questioning.


Senator Dagenais: Thanks to our witnesses.

My question is for Mr. Ngo. You are an adviser on financial crimes policy. How well equipped is the department to fight organized crime and terrorists who might use crypto currencies to evade police investigations? Do you have enough people? I hope your answer will be no.

Gabriel Ngo, Advisor, Financial Crimes Policy, Financial Sector Policy Branch, Department of Finance Canada: Thank you for your question.

First of all, the rules we proposed in June for consultation purposes were designed to mitigate risks. The rules would impose measures to limit the risks of money laundering and terrorist financing.

In terms of crypto or digital currencies, we want to regulate them by using the same approach as is used by other financial institutions for disclosing entities. We want to regulate all disclosing entities equally. We do not want to regulate their mechanisms, but rather examine the services they provide. We really want to focus on the transactions the minister mentioned, those of $10,000 or more and exchanges of fiduciary currency for virtual currency.

As to being adequately equipped through the proposed regulations to mitigate the risks posed by organized crime, that is the ultimate objective of these regulations.

Senator Dagenais: Are you saying that financial technology companies could be regulated in a different way?

Mr. Ngo: No. The purpose of our regulations is to target the services they offer, but not the companies themselves. The focus of the regulations is not so much the financial technology companies as the companies that offer financial services and use virtual currencies. As the minister said earlier, the goal is not to regulate financial technology, but rather to regulate financial activities.

Senator Dagenais: I have one final question.

Ms. Ryan, has your department considered legislative changes to focus in on virtual currencies, which are increasingly popular? Given their fluidity and what can be done with these currencies, have you considered amending the legislation related to digital currencies?

Ms. Ryan: I would say this is regulatory matter, as Gabriel just said and the minister noted earlier. We have adopted changes to the legislation and we are now implementing regulations to address this.

Senator Dagenais: Thank you very much.


Senator Wallin: Mine was just a quick follow up on what Senator Wetston was getting at. I don’t expect a long answer. On my earlier question about a trigger, the scale of activity hasn’t yet warranted a framework, but you are kind of working on it so that it’s there and you are getting ready. Is the trigger financial or is it political? What are we waiting for so that we don’t react after the fact to a potential crisis?

Mr. Stewart: Well, I would very much prefer to characterize a trigger as financial and not be in a situation where it’s any other, to be clear. But I think it would be a mistake to characterize it even as strictly financial. For financial stability reasons or the integrity of the financial system and people’s trust, it would be a scale of activity, a large loss, and we have seen large losses associated with crypto-assets at the point where they are exchanged into fiat currency and people have hacked systems. That concern exists. In Canada, we don’t have the scale of activity that gets us to the level of concern on integrity.

I think I would interpret your question more broadly. Do we need a framework that focuses on these things and in a more comprehensive way?

Senator Wallin: Anticipatory.

Mr. Stewart: Is it not just losses or destabilizing the financial system, but is it a fraying of people’s ability to have faith in the system, to know what to do, and how to protect themselves, and all of these things?

My answer is I think we are on it but in the normal way. We aren’t picking a specific framework for crypto-assets. We are enhancing consumer protections and disclosure. The security regulators are on it because they are worried about investor protection. We are on it from an anti-money laundering point of view. There are a lot of ways we are enhancing what we’re doing with attention to this.

The Chair: Thank you very much. Having no more questions from the senators, I want to thank you all very much for being there. Those of you who haven’t been here before, we look forward to your return. Thank you for being so frank, open and professional.

(The committee adjourned.)