THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
EVIDENCE
OTTAWA, Wednesday, April 6, 2022
The Standing Senate Committee on Banking, Trade and Commerce met with videoconference this day at 6:31 p.m. [ET] to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8).
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Good evening, everyone. My name is Pamela Wallin. I am a senator from Saskatchewan, and I am the Chair of the Standing Senate Committee on Banking, Trade and Commerce.
Before we begin tonight, I would like to remind senators and witnesses to keep their microphones muted unless recognized by the chair. Tonight, I have a special request of senators and witnesses to keep their interventions brief. We have four witnesses in four half-hour periods so not everybody is going to have an opportunity to ask a question. If you wouldn’t mind, try and keep your questions to the subject matter that you are focused on. Then we’ll see if we can get around as much as possible.
I would like to introduce the members of the committee participating in tonight’s meeting, starting with the deputy chair, Senator C. Deacon, Senator Bellemare, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Massicotte, Senator Ringuette, Senator Smith, Senator Woo and Senator Yussuff.
For the first hour of our meeting tonight, we’ll focus on the Canadian labour market. We have two half-hour panels. For our first witness tonight, let me introduce Mr. Simon Savard. He is the Senior Economist at the Quebec Institute.
Mr. Savard, do you have some opening comments to make?
[Translation]
Simon Savard, Senior Economist, Institut du Québec: Good evening. I am Simon Savard, senior economist. I work at the Institut du Québec. The Institut du Québec is a non-profit organization that aims to identify the policies and actions needed to improve Quebec society based on evidence, rigorous analysis and best practices. After being hit hard by the pandemic, the Canadian labour market has rebounded quickly and vigorously, but it has also been transformed.
As of February 2022, workers have massively returned to work. Indeed, compared to the 2019 level for the 15 to 64 age group, which is the largest age group in Canada, the Canadian labour market has gained almost 500,000 more jobs, including 440,000 full-time jobs, and the number of unemployed has fallen by 66,000 in this age group.
Thus, not only are the labour force participation and employment rates of the main age group better than they were, but there are also fewer unemployed. The labour market is tightening, and the number of vacancies that reflect the demand for labour that employers cannot fill has jumped by 400,000 in two years.
Despite this strong and rapid recovery, the health crisis has still highlighted some challenges. Many workers aged 65 and over have decided not to return to work and to retire slightly earlier than planned. The closure of the borders in 2020 continues to put downward pressure on the labour supply, particularly because of the accumulated delays in obtaining permanent residency; emigration is on the rise and inter-provincial travel has changed. There are shifts in labour market preferences, as there are sectors, such as catering and accommodation, that have lost workers, especially young people, to other sectors, such as professional, scientific and technical services, health care and social assistance or education.
In short, workers have been displaced or relocated and the consequences are really beginning to be felt. In such a context, the Institut du Québec recommends that lifelong learning be enhanced to increase the resilience of Canadian workers in the face of change. To do so, the government should work on two fronts: first, upstream, by increasing the credentials and essential skills of a large part of the population, and second, by improving the attractiveness of lifelong learning.
It is particularly on this second point that the Institut du Québec recommends improving the Canada Training Credit, which, as you will remember, was introduced in the 2019-20 budget with the aim of overcoming the barriers to professional development for Canadian workers who wish to acquire further training.
In this sense, there are three avenues that are favoured: The first would be to increase the amounts that can be accumulated in the credit. Currently, we are talking about $250 per year in the form of tax credits. This can be done through a voluntary plan mechanism or an employer contribution.
This would allow holders to have greater financial means to adapt to the reality of different training offers to ensure a significant requalification or upgrading of the skills of the Canadian workforce. The second way would be to increase income support during training beyond the 55% income support provided by Employment Insurance to reduce this opportunity cost of training.
Finally, information on available training should be consolidated in an easily accessible one-stop shop to help Canadian workers navigate their way through. Thank you very much.
[English]
The Chair: Thank you very much.
Senator C. Deacon: Chair, I’m happy to let other colleagues go ahead to begin with.
[Translation]
Senator Ringuette: Thanks for your presentation, Mr. Savard. I can say that some of my colleagues, including Senator Bellemare, agree with you completely. We know that in Quebec, employers must have a training fund; can you explain how that works, and should that be emulated nationally?
Mr. Savard: First of all, this training fund is not for all companies. It is what is commonly known as the “1% law,” so this fund is only used by large companies. Yes, this is something that could potentially be emulated from a continuing education perspective, but we believe it needs to go further, because training is a responsibility that is shared by the individual, companies and post-secondary institutions. The important thing about training is that it is part of a life path, both in terms of initial training and continuing education. We need to develop this training reflex. What we see is that workers who have this reflex show greater resilience on the labour market.
Senator Ringuette: Does this 1% experience really generate training with the company, according to the Quebec experience?
Mr. Savard: That’s a good question; I could give you the answer following my appearance here.
Senator Ringuette: Thank you.
[English]
The Chair: We’d appreciate that. Thank you.
[Translation]
Senator Loffreda: Welcome to our committee, Mr. Savard. The Senate is currently holding a debate on virtual work.
What are your views on telework, both in terms of productivity and societal well-being?
With everything we are experiencing with the virus, there will certainly be changes in people’s future lives. I would like to know your opinion on this very important topic.
Mr. Savard: We think that teleworking brings redistributive effects. There are people who have moved to other locations and bought a cheaper house to reduce their lifestyle. What really matters to us at the Institut du Québec is to see if all this generates productivity gains.
We have already been in a pandemic situation for two years. Currently, companies and workers are adjusting to this model. Will it be a totally virtual model? It will depend on the type of job. For example, some skills are better exploited through virtual work than through face-to-face work.
If we take the example of more routine tasks, such as writing, which is individual work, this can be done remotely. There are obviously productivity gains that can be generated there, because if an employee does his or her work during a day when he or she does not need to travel, this will promote productivity gains. However, when we talk about tasks that require more creativity or the ability to brainstorm through discussions with a team, we realize that this is an aspect that is missing in virtual work. That’s why companies are currently adjusting to this model.
Virtual work can also give companies the opportunity to source labour from other places if it isn’t available locally. However, in the labour force survey, this issue is still peripheral and isn’t widely observed. Let’s see what the future brings.
[English]
Senator Marshall: Thank you, Mr. Savard, for your opening remarks. You were saying that the number of positions now exceeds the number of positions pre-pandemic. Is there any information on the quality or the pay structure of the jobs comparing pre-pandemic to post-pandemic? Are the positions created now minimum wage? I’m trying to get a comparison of the quality of the jobs now post-pandemic. Do you have any information on that?
[Translation]
Mr. Savard: Thank you for your question. First, in the past two years, many lower-paying jobs have been squeezed out of the labour market, given their nature and the type of industry. For example, think of all the high-contact industries, such as food services, hospitality, culture and recreation, where several events have been cancelled, as we know.
At that point, there was an overall artificial increase in wages, both in Quebec and in the rest of Canada. When these workers returned to work, wages fell. However, across Canada and starting now in the United States, the types of jobs are being overhauled in a certain way.
Currently in Canada, the participation rate is about the same as before. This means that workers have really moved from one industry to another. We have a very good reason to assume that the quality of jobs has improved, in terms of both pay and benefits. These workers are still in the labour market and there have been some fairly significant wage increases in recent months.
However, an inflationary component has recently been linked to this issue. Nevertheless, we can conclude that this restructuring in the labour market has been very beneficial for workers. Of course, the underlying issue is the aging population and how that affects the Canadian labour market. Right now, there are 400,000 more job openings compared to two years ago. There are many opportunities in the labour market.
We’ve seen a recent increase in the number of people changing jobs because the opportunities are simply available. Companies that are faced with this issue and that need to hire workers to keep production running must change their selection criteria by training the labour force directly in the workplace. For employees, it’s a very positive environment.
Senator Bellemare: Mr. Savard, welcome to our committee. I carefully read one of your reports on labour shortages in Quebec. In general terms, you said that the factors to consider include the fact that governments must change their public policy paradigm.
What does this mean for the federal government, for example, in terms of its public policies?
Mr. Savard: Thank you for the question. This means that it’s necessary to completely adapt the industrial policy to the constraints of labour shortages. We’ll be dealing with this reality until at least 2030. This must be done by prioritizing and focusing on job transformation rather than job creation.
With the available labour pool, if no workers are qualified to hold certain jobs, rather than creating jobs, it’s important to use these workers and upgrade their skills. For the government, this means that any new public investments should include a labour force impact analysis and a strategy to ensure the availability of workers. It’s necessary to ensure that workforce deployment measures align with government policies, particularly when labour shortages affect the delivery of essential services to the public, such as health care or education.
We’re seeing the whole issue of essential public services. The COVID-19 crisis resulted in a great deal of absenteeism in the health care sector. The workforce then became a crucial issue. In terms of education, the workforce can also become an issue, given the high turnover rate and lack of teachers. This can ultimately affect the quality of teaching, lead to higher dropout rates and reduce graduation rates.
In the private sector, the issue is really about how many opportunities have been missed and how much wealth could have been generated by employing skilled workers. For the federal government in particular, it’s necessary to replace the job creation criterion with more modern and innovative criteria, such as productivity and innovation, and to improve workforce and skills management planning through ongoing training and better working conditions.
A whole range of measures can be taken to adapt and train the workforce in addition to increasing the labour force, especially in provinces with larger aging populations, such as Quebec.
Senator Bellemare: Thank you for your response.
Senator Gignac: I would also like to welcome you, Mr. Savard. Congratulations on the wonderful work being carried out by the Institut du Québec. Please give my regards to your president, with whom I’ve had the opportunity to participate in several forums in recent years.
In your latest report, you said that Quebec ranks second in Canada among the provinces with the highest job vacancy rates. However, as you know, Quebec is among the provinces with the lowest immigration rates in Canada. The rate is certainly lower than in Ontario, Alberta and British Columbia. Has your institute analyzed the role of immigration in this labour shortage? In particular, could anything in the federal government’s programs be addressed or improved?
Mr. Savard: Thank you for your question. Yes, we’ve done this a few times. Two years ago, in a report, we analyzed the impact of different immigration thresholds on the Quebec economy. The results showed that, with respect to the aging population and the short-term effect, changing the immigration thresholds will have little impact. Instead, immigration is included in the long-term strategies that will promote economic growth, but also a certain vision for the economy. Currently, temporary immigration is used to address labour force issues. However, the fundamental issue is the choice of skills required to fill the jobs of the future. The jobs must, of course, be filled. The report showed that, in the future, if you choose the right types of skills and the right immigrants, from an economic standpoint, the labour market integration process is faster. You then see a positive impact on society in the longer term. We prepared this report for Quebec, but the findings can certainly be applied across the country.
[English]
Senator C. Deacon: Thank you, Mr. Savard, for your very strong presentation. I want to ask you about the role of business investment in helping to improve labour productivity through digitization, automation of incumbent industries and as a result of improved labour productivity helping with labour shortages. Do you have any research on that and comments there, please?
[Translation]
Mr. Savard: Thank you for your question. We’ve been exploring this topic in recent years. I could send you some specific studies. Statistics Canada has conducted some insightful studies on this topic. These studies showed that, for some types of jobs, automation can help. However, automation can above all change the nature of the jobs and help employees perform their tasks. To address workforce issues, you must be very careful in this area.
However, when it comes to private investments, there are real shortcomings across Canada. Over the past 10 years, or at least since the 2008 recession, there hasn’t been enough investment in machinery, equipment and tools to really increase Canada’s economic potential and productivity. Right now, the labour force issue is significant. We need that additional productivity to generate growth. So, yes, this shortcoming definitely must be addressed across Canada.
[English]
The Chair: We would appreciate it if you could forward any information from that study. Highlight it for us and send it on, and then we can use that in our report. Thank you for that.
Senator Yussuff: Mr. Savard, thank you very much for your presentation and welcome to our committee. I have a couple of questions in regard to Quebec, specifically around the history of mandating training as part of the payroll requirement.
Quebec has had the longest history in this country of requiring employers to spend 1% of payroll on training their employees. Given that long history, what have you seen in terms of change, in terms of cultural adaptation and thinking around the responsibility for training in Quebec? How successful has this policy been? Despite many changes in government over the decades, the policy is still there today. Maybe you could shed some light on that, and then I’ll have a quick follow-up question.
[Translation]
Mr. Savard: Thank you for your question. As I said earlier, I’ll take note of the question and send you information on the topic.
[English]
Senator Yussuff: If I may, I have a quick follow-up question. Given the importance of productivity gains and the changes that we’re seeing in technology — almost all businesses are adapting — is this something that is fundamental to the success of Canadian business across this country? If it is, how do we get Canadian businesses to spend better, which has been the bigger challenge? We see the aggregated numbers for OECD countries, and Canadian employers are not spending enough on training in this country. How do we change that reality, from your experience?
[Translation]
Mr. Savard: Thank you for your question. It’s an excellent question. In our society, it’s crucial to increase private investments. Companies will invest if they have confidence in the future. It’s also about changing the corporate culture to take risks and invest more. This field of study would benefit from further exploration. I’m talking about the link between business confidence, the tendency to invest and the impact on private investments in Canada. That would certainly be an area for further study.
[English]
The Chair: Thank you all very much. Mr. Savard, we really appreciate that. Thank you for being willing to send on more information.
We had hoped to have the second part of our panel on the Canadian labour market with John Stackhouse. We’re having some technical difficulties, so we will carry on. Everybody, switch your focus now to crypto-currency and bitcoins and some of those other topics that we’ve been dealing with over the last few months.
I’m pleased to welcome Marcel Kasumovich. He is the head of research for One River Asset Management. He has a long career on Wall Street and in private equity. Now he is in the new world of crypto.
Mr. Kasumovich, welcome. I know you had prepared remarks. Thank you for those. We’ll make sure they are translated and shared because I know you’re willing to jump right into the questioning.
We’ve heard from people on the government side that they’re working on a regulatory framework for this issue, but it could take three to five years. A few weeks ago, we had Mr. Demarais with us, who said we don’t have that time, that the horse is out of the barn.
So where are we on the regulatory front? What are you in the industry doing yourselves at this point?
Marcel Kasumovich, Head, Research, One River Asset Management, as an individual: First, thanks so much for having me. It’s an absolute pleasure and honour. These issues are going to get quite complicated, so if at any point anybody would like a bilateral discussion, please feel free to reach out. I’m absolutely happy to lend that time. I do feel it’s an important civic duty.
The Chair: Most generous. Thank you.
Mr. Kasumovich: In the context of the regulatory environment, what we’re seeing is, as the market’s value of the digital economy grows — and it’s now in excess of $2 trillion — there’s a strong desire by the participants in that ecosystem to enter the mainstream.
Incrementally, what you’re seeing are central banks like the Federal Reserve start to define what it means to be a digital bank. Those regulations are going to be finalized in April.
You’re starting to see money transmission rules be well defined by the Financial Action Transaction Force. Those are also being implemented within Canada through FINTRAC, for example.
On April 1, a definition was provided in terms of what a travel rule would look like in the context of crypto-currencies. There is a regulatory movement that’s bringing everything to the mainstream. It is slow. But I think you have to start somewhere and that’s started.
We’re also seeing a lot happening out of the U.K. To the extent that Canada was early in the testing of the digital rails with Project Jasper, I do think the catch-up on the regulatory side can be quick. The key is really bringing some public-private partnership together to help further that along.
Senator C. Deacon: Thank you, Mr. Kasumovich, for being with us.
I’m wondering about reaching beyond crypto-currencies and the use of blockchain technologies and helping government to do a lot of different things.
We had a presentation in terms of the tokenization of excise tax collection in Australia. I have certainly observed with interest the use of bitcoin as a payment rail through Strike and Lightning. I wonder if you could talk about perhaps where regulatory challenges might be less burdensome in order to help us to get comfort as a society with the use of blockchain technology, and therefore accelerate its use in other ways.
Mr. Kasumovich: This is a hugely important point.
I think on the regulatory side it feels like a burden because the current web of economic activity and financial intermediation is challenging. So we require a heavy regulatory burden in measuring and monitoring all of that.
In the new world, it gets a lot simpler in ways. So with the simplicity of the new world, what do you end up with? You end up with focusing on the efficiency of the technology. And what I’m seeing on the private side, the reason why this isn’t going away, is that it’s better. It’s just a better user experience. We’re able to better value capital. Were able to better value labour.
In your previous discussion, the issue of labour has come up. Even the way we’re valuing labour in the context of these digital currencies and blockchain technologies becomes far more efficient. So the efficiency gains to be had from blockchain technologies are not only substantial, but the gains are also going to accrue more to labour and less to centralized forces. This is very much a force for good in that context.
I think it’s right to focus on blockchain technologies. I think the disintegration of crypto-currencies and blockchain technologies in some ways is impossible because you need that tokenization to then leverage the value of blockchain technologies. But I do think evaluating those blockchain technologies as a core source of productivity enhancements can ultimately lead to a better user experience and just a flatter structure.
Things like credentials become far less important. Things like pedigree become far less important, because of your value for what you’re contributing to that ecosystem. So I do think it’s an important point.
Senator Massicotte: Thank you for being with us today.
Let me deal with the risk aspects. At least every week, if not every day, we hear of some major fraud where people lost a lot of money with crypto-currency of some kind.
I presume you must see a role for the government to try to get a handle on that. Your suggestion is to go as far as establishing a direct relationship with our own fiat currency and, therefore, you diminish the risk completely. But you are pushing away some space from other players; what are your thoughts about that?
Mr. Kasumovich: There is a lot there. Let me frame it in a couple of different ways.
Let’s focus first on the fraudulent elements.
The interesting thing with these blockchain technologies, particularly the higher value ones, is that as they’ve risen in value their security has also gone up.
If we think of the most valuable unit in this digital economy ecosystem being the bitcoin protocol, and if we evaluate that bitcoin protocol, it’s operated 24 hours a day, seven days a week, 365 days a year for almost 10 years straight with no intervention. So it has been the anchor of trust and security.
Now, there have been bad operators in that ecosystem. One, for example, was charged with fraudulent activity for past activity. The interesting thing in the case of fraudulent activities on these secure public blockchains is the record of the transaction is immutable, so it can never be changed.
Once we identify the wallet, the actor that has executed the fraudulent transaction, we can then isolate. We don’t know who it is. But we can isolate the wallet itself and isolate the actor. And then in some ways they become a prisoner of their own fraud, because the minute that they touch those funds you can then start monitoring where those funds are going.
So in the case of the most recent fraud — which, in current dollar terms, $4.5 billion is substantial — they were unable to tap into those funds. And those funds will ultimately be redistributed to the people who were harmed.
Now, in the smaller, more vibrant and I would say riskier and on the outer edge of the technological innovation, that’s where you’re seeing the security profiles are lesser; the degree of loss is lesser. I think that’s where you’re still seeing a lot of the innovations come with the consequence of lost capital. Typically the players who are acting in those areas understand those risks. So it’s a nice marriage of risk and loss to some degree.
In the context of fiat currencies, central bank digital currencies will definitely have a role to play here. The only question is what? So if we think of something like bitcoin as being a unit of collateral, almost like a government security — more than a payment system per se — then the CBDC’s role may be for the ease of simple transactions, buying a coffee at a Starbucks or a Tim Hortons, whatever it may be. And the higher value chains will be used for other purposes, like clearing large value transactions on any given day.
So the use case for all these will be quite different. But I do think the central bank digital currencies will have an important role to play in this ecosystem in the future.
Senator Loffreda: Thank you, Mr. Kasumovich, for being here with us. I’d like to have your insights and your judgment on two important issues with crypto-currency and bitcoin.
Many will say that bitcoin is a hedge against inflation because it’s a fixed supply, 21 million units, decentralization. Some will argue that it’s not because of the high volatility of bitcoin and it fails to fulfill its promise. Look at March 2020 where the value dropped close to 50%. Look at May 2021 where the value dropped close to 53%. I would like to have your insight on that.
More importantly, as we accelerate the usage of crypto-currency, what will be the effects, quickly, on our economy, on quality of life, on the middle-class, those striving to become or get to the middle-class? Is it a currency where the rich will get richer?
Mr. Kasumovich: Terrific questions.
Starting first with bitcoin in the context of what it is. At some level, I would say that you have these two components are really important to distinguish.
The technological component is probably underappreciated. If you think of what this does, it allows you and I to transfer value between us with no third party. So we can make that a large value transfer; we can make it a small value transfer. There is no trusted intermediary. It’s just math. So that is kind of the technological component.
Then the question is, what can we build on it? Senator C. Deacon had mentioned some of the various payment systems that are being built on it, incredibly efficient. It will make everyone’s life in the context of financial transactions better.
Then the issue is, okay, so if that’s the technological component, how do we think about its underlying value? And this is where the issue of the inflation hedge comes in.
It’s unfortunate that the early adopters of bitcoin put this forward in a bit of an extreme libertarian context, which is fine. You are allowed to position it as you wish. There is undoubtedly an inflation hedge component to the asset itself, because the underlying security of the protocol is really defined by the energy it consumes, which is considerable. What makes it so secure is that it secures a lot of energy, so if you and I want to hack the system, it’s very costly to do so, and that energy component ends up being its nominal anchor, so to speak.
To the extent there is widespread inflation, the value of energy goes up, the cost of running that protocol goes up, and the value of the underlying asset rises with it, so there is an inherent inflation hedge to it.
To the extent that this becomes a useful asset for portfolios more generally, or an asset that you need to hold for the intermediation of some other technological innovations that occur, then its asset value should rise, and its volatility should decline. We’re not there yet. We are just at the very starting point of seeing the breadth of what these technologies will do for ordinary people, which is going to be incredibly positive, because it allows people to value themselves without pedigree and without credentials. To the extent that you can contribute to these networks, you can do so without playing any games on the educational side or in terms of social standing and social hierarchy. It’s very, very powerful to that extent.
Maybe I will pause there. I think those are the key thoughts on valuing energy.
The Chair: Very interesting. Thanks.
Senator Smith: Thank you for coming out and speaking with us.
As a neophyte looking at bitcoin, if you had to give two or three suggestions for how neophytes should look at this particular opportunity, what would they be?
Mr. Kasumovich: That’s a good one, because we’re all neophytes at some level. It’s so early in the process, it’s kind of like the early stages of the internet, where even for the people who are close to it — I have been dabbling in this since 2012, and I’ve been focused on the institutionalization of these assets now for a couple of years — it’s changing so rapidly that every day feels like a new day.
From ground level, how would I think of it? I come back to its principles. What is this trying to do? It’s trying to accommodate value transfer, so just the transfer of money, so to speak. You and I can transfer value to one another without any third party intermediation. This is where the concept of decentralization becomes very important, and with that decentralization comes increased inclusion. Nobody can say whether you and I should be able to exchange value. The math tells us we can do it, so if we choose to, we can execute that transaction any time of the day, any day of the year, from any place.
Now, there will be regulatory on- and off-ramps and things of that nature. These are all footnotes. That’s what the technology does. It is the very primitive payment rails, almost like laying tracks of a train. You lay these tracks, and the things we were arguing about when we were first laying tracks, like should it be 7 1/2 feet wide, or should it be 4 1/2 feet wide, once we settled on an international standard, we started building trains. Then we started building them to be more comfortable, and to be faster, and with food and coffee. And then we yell when it’s a little late. It’s very similar.
All we have done right now is we have built those rails, and then the question is what can we do on top of those rails? The answer is a lot. You can change the way all actors in the economy operate to encourage this decentralization and this point-to-point contact without any third party intermediation, which is remarkable. That’s how I would think of it at its most primitive level.
The Chair: Excellent. Thanks.
Senator Marshall: Thanks very much for your presentation.
Is there any information on the types of transactions that use crypto-currency? I know when you responded to Senator Massicotte, you were talking about fraudulent transactions. Would there be any information with regard to how extensively crypto-currency is used for money laundering? What percentage of transactions would be taxable, so the federal government could get their share? You would really need to know that type of information, wouldn’t you, to build a regulatory regime? Could I have your comments?
Mr. Kasumovich: Absolutely. Now, I wrote down the last two. Can you remind me of the very first one again?
Senator Marshall: I was wondering, does anybody know the types of transactions that use —
Mr. Kasumovich: Right. I got it.
Perversely, the single most powerful tool that has emerged within the digital ecosystem is a thing called stablecoin. What a stablecoin does is it collateralizes fiat assets.
Ironically, you have this thing called bitcoin that everyone focuses on as going to become the inflation hedge and will disintermediate the currencies and so on and so forth, and the killer application in the digital ecosystem is this thing called stablecoin, which is nothing more than a digital dollar.
The underlying collateral of choice in this vast, digital ecosystem is a digital dollar. What is it used for? It’s used to transfer collateral across people who are trading in all sorts of different areas. It could be physical trade, but it’s mostly financial trade.
If you and I are engaged in financial trading, and I need to post collateral to you as an intermediary, it is more efficient for me to send you digital dollars, because they clear immediately, as opposed to a bank wire, which may take a day or two. And then I have to check, and they might not work on weekends. The cash I need to hold to accommodate those transactions is less, so it is more efficient for me as an intermediary.
Perversely, in this entire digital ecosystem, it has been a digital dollar encouraged by the private sector and accommodated by the public sector that has been the most successful use, not really as a payment vessel, but as a way of transferring value.
There are new technologies being built. For example, let’s say I’m great at Twitter, and everyone loves my material. You can now tip me in Twitter. You can see where this goes, where my independent content is valued by a collection of people, and they can then pay me by clicking on a button, because they want me to stay on Twitter and share my content. All of a sudden, my independent views have some monetary value that can be accrued back to me by a collection of people I have no interaction with on a regular basis. That is all done through digital payment rails, and that is just the start. These are the ways I think ordinary people will be able to find interesting ways of making a different living than they are accustomed to.
Normally, you would think, well, if I have content to share, I have to go to a centralized source, get a job, ask for a newspaper article and publish that work. That will take years. If I’m 16 years old, and I have great ideas, I can put those out into the ecosystem, and if people are willing to pay for them, away I go; I have a business. It’s a very interesting use that I think will take off, because you’re seeing it done.
Senator Marshall: Would you know what the transaction is for? I get the impression that crypto-currency is used extensively for money laundering. There is no way to tell that, is there?
Mr. Kasumovich: There is. Here is the greatest thing, and this comes to your second and third points, money laundering and taxation.
On money laundering, here is the beautiful thing about these public blockchains. Their record is permanent. Now, you don’t know who I am until you have the right to knock on my door and say, “I think you’ve done something wrong, and I need to understand everything you have done,” the same as with your email. You have no right to hack into my email, but if I have done something wrong, and there is due cause, you can come and start looking at my email and say, “See? I was right.”
Same thing in the digital ecosystem. You don’t know who I am within that ecosystem until you have the right to do so. With due process, you can then discover all the transactions I have done. It’s immutable.
The interesting thing with immutability is that we can use on-chain analysis to see what is happening. So around the Russian war and the Ukraine war, we can see exactly what is happening in terms of flow.
For example, there’s a group called Chainalysis, and they specialize in this area. They identify the percentage of activity tied to illicit activity precisely. It has been coming down sharply over time, so it’s a very small share. In fact, U.S. law enforcement has used the blockchain as a very successful tool for thwarting illegal activity. The short of it is that bad guys use cash. It’s safer.
The Chair: We have six questions and nine minutes. You’re giving us great answers here.
[Translation]
Senator Bellemare: My question concerns the digital currency of central banks.
I understand that experiments are being done in China, South Korea, Sweden, and even the Bahamas, and that these countries all have a central bank digital currency. Does this digital currency also apply to blockchains? If so, what does this mean in terms of stabilizing the central bank currency?
The central bank will certainly have an advantage over the private sector if it moves towards digital currencies. Can you shed some light on central bank digital currencies?
[English]
Mr. Kasumovich: Sure. I will apologize for responding in English, but it has been years. I left Ottawa in 1996, so it has been a while.
Think of the central bank digital currency as just a digital version of the same way we use paper money today. Think of wholesale banking like the things that would happen in international trade. That also involves currency, but it’s never in the physical form. Likewise in the digital ecosystem, that distinction will remain. Think of central bank digital currencies as just being used for convenience. The beauty of it is way more efficient because all of the settlements are instantaneous. If you’re running a small business, and you’re collecting proceeds in digital currencies, Saturdays and Sundays count. I can receive payment on a Saturday and have that instantly allocated to my bank account, not held somewhere where a bank is earning interest on those funds not yet paid. It’s a more efficient version of cash.
From a central bank’s perspective, it can also be a very efficient way of identifying who needs cash. To the extent that fiscal policy and monetary policy are working together to support a specific policy mandate — payments to underprivileged people during times of duress — you could then end up with policy that is far more directed because those are going to very specific digital wallets.
Think of it as a more efficient version of the paper money that we currently use. In the same way that we have this division between wholesale banking and currency use, that division will remain in the digital ecosystem.
Senator Woo: Can you explain why you think crypto-currency — and more specifically blockchain — will increase the returns to labour over, I guess, capital? You talked about the levelling of credentials and the ability to enter the market. I understand that part, but I also see massive increasing returns to scale for first movers. I don’t quite understand this point about increasing returns to labour over the long term.
Mr. Kasumovich: We have had a productivity revolution around technology. Typically, productivity accrues to labour because there is competition at the corporate level and profit margins come down so the productivity gains are then allocated. That’s kind-of textbook economics. What has happened in practical reality is that through centralization, these companies have built such deep moats around them that the competitive pressure has gone away. Who is the real competitor to Google? If you are a competitor to Google, they will buy you.
So the competitive pressure goes away, profit margins stay higher and then labour gets squeezed at some level. As we migrate to Web 3.0 — and this is where the Web3 Council, that has just been created, can be extremely helpful to policy and the private sector as a co-joining mechanism — in decentralization, you strip out. Google becomes just this engine. It’s like an internet engine where the gains that are being accrued within that ecosystem are then reallocated to the users. For example, if I’m playing a game, the more I play the game the more value that game creates and the more value comes back to me as a player of the game as opposed to the entity that owns the game. So you end up with gains that are way better distributed amongst labour and way less a concentration of profitability. It’s a hidden feature, but I think it will be an extremely valuable one for ordinary people.
Senator Woo: That is a prediction as opposed to an empirical observation to date. Is that right?
Mr. Kasumovich: Absolutely.
Senator Yussuff: Thank you, Mr. Kasumovich, for being here and for sending your notes in advance. It gave us a bit of an insight to at least understand where you’re coming from.
Obviously, $2-trillion of transactions doesn’t seem to me that there is no confidence in the system. Obviously, people already have confidence in the system despite the lack of a regulatory regime to govern this in a way that gives us some global confidence that we’re there.
My question is more mundane. Given the slowness in which regulators are moving to deal with this reality, what’s your sense of the global governance that will give more people around the world — the trillions of people in the world — assurance that this system is something they should have confidence in. In the absence of global governance, there is a real challenge as to how we should have confidence.
Mr. Kasumovich: I have two points, and I do think they’re important. The confidence comes from the math. It just has to work. So the thing we can say about the two most valuable protocols, bitcoin and ethereum — ethereum was created by a Canadian. It’s a remarkable platform. They’ve undergone incredible innovation in the recent past that will be unlocked in the period ahead. The working of that math and the sustainability of the clearing of transactions will build the trust. I think that’s how it has built the trust. I think that’s why people are getting more comfortable with it, and the main thing I can say is that it’s not going away. A tangible example is that when the European Investment Bank wanted to issue a digital bond, it did it on the ethereum rails. This is fascinating. Why? Because it’s interoperable globally, so it can touch everything. You have 650 million people in rural India that don’t have access to the internet, and their first engagement in banking will be digital.
About the confidence in the regulatory standpoint — regulators are catching up. We have to remember that the reason why regulators were a little bit behind is that they didn’t believe in this stuff. They thought it would go away, and now they’re like, “Wait a minute, it’s not going anywhere. Not only is it not going anywhere, but people seem to like it.”
Again, I would use this example of the money travel rule that Canada integrated into its money tracking rules on April 1. The exchanges accommodated that rule change, of course. It’s in their interest to do so. They want to do business in Canada. With time and increased value, you will see the math work. I don’t think it will be a heavy-handed regulation. I think it will be a commonsense regulation that allows the private sector to flourish with these technologies.
Senator Gignac: Thank you, and feel free to send a written answer because we have run short of time.
I could understand the benefit of blockchain technology, but I still have concerns and problems understanding the value of some crypto-like bitcoin, which, from my point of view, is really more a commodity than a currency. I realize that we have so many bubbles, including dotcom and tulips in Holland 150 years ago. What is the difference between bitcoin and the tulip, for example? At that time, they had no intermediary. It was between two people who agreed on the value until the value suddenly declined. I try to understand. Could you please react to that?
Mr. Kasumovich: Tulips die. Bitcoin is forever. It may not be valued, but it’s forever. The protocol is run by a collection of people who choose to allow it to run and not by some centralized force. Its value is unknown, but its technology is here forever.
To think of it as a commodity is fair. I don’t think we know what it will be yet. As a currency, it’s more of a payment rail. It’s more these train tracks of sorts. What it turns into is going to depend on the innovation we put on top of that, much the way the internet did. The internet laid the tracks, and then kind of made a mess of it by taking away a lot of the freedoms that we are expected to have on the internet.
Doing a Google search is actually very valuable to the owners of Google, not so much for the person doing the search other than the output that comes back.
A lot of those parallels will apply. In the same way that the internet was unknown in terms of where it would go, that’s where we are with a lot of these digital technologies, where we have these units that are critical to running the rails and we don’t know where we’re going to be using those units in the context of economic activity. But we know we’ll be using them.
The Chair: I want a final quick word. You said in your opening remarks here that there are a lot of Canadians in this field, yourself included. Have we missed the window or can we still become the home ground for this?
Mr. Kasumovich: I don’t think you’ve missed the window. I think the future is ahead of Canada. We are very early in terms of where things are headed.
If we use the U.K. as an example, 48 hours ago the United Kingdom put out this grand claim of a crypto sprint and what are they trying to do? They’re just trying to bring developers and the public sector together to innovate and make things better.
The ground is fertile for that type of engagement. I will say the Canadian presence, particularly in the ethereum protocol, and this Web3 Council that’s now being established is really quite remarkable. I do think the nation as a whole can leverage that knowledge.
The Chair: Thank you very much, Marcel Kasumovich, you’ve given us a lot to think about there. Thank you. People are applauding you.
Senator C. Deacon: Thank you very much.
The Chair: We are going to take a short break. We’re going to go back and try and change topics again and go to Mr. Stackhouse. We seem to have resolved that issue. Mr. Kasumovich did offer — and we may take you up on that — to deal with you bilaterally on this issue for more questions. Thanks so much.
Mr. Kasumovich: Thanks so much for the time.
Senator Massicotte: Thanks very much.
The Chair: We are going to go back to start with John Stackhouse, Senior Vice President, Office of the Chief Executive Officer, Royal Bank of Canada, and we’re going to switch our focus back now to the labour market.
John has many areas of expertise. This is one of them. Thank you so much for joining us and our apologies for all the complications there. If you have any brief opening remarks, we’ll hear those or we can go right into questions.
John Stackhouse, Senior Vice President, Office of the Chief Executive Officer, Royal Bank of Canada: Whatever is best for you, Senator Wallin. I’m sure it’s been a long evening.
The Chair: Why don’t you set the stage just for a minute or two about your thinking about the labour market today.
Mr. Stackhouse: We’re in an extraordinary and uncharted point of the world but certainly the economy and of the labour force. We’ve all seen great labour shortages over the last many months, there’s been many theories about the cause of that.
I’ll share with you some of our new research showing that the biggest force under way is what I might call a shift change, people moving from lower-income, high-contact jobs to higher-income, remote jobs. This is generally a good thing, although if you’ve been in line for something at a takeout place or been frustrated with service in a restaurant, you’ll have to bear with the frustration because the people at the other end of the equation are actually doing better.
We’re seeing lifts in income and interesting correlations to education which Canada should be able to take advantage of because we are a highly educated country compared to not only much of the world but our main competitor set.
Once we get immigration up and running again, which we should, that’s something we know how to do as a country, then it’s game on if we have the right plans and playbook in place.
That said, we’re going through a restructuring — I don’t think that’s an overstatement — of the global economy. This includes shifts in resource production and sourcing, driven acutely right now by the Ukraine war. That is likely to continue. But predating that and extending well beyond this moment is the reshoring movement, which President Biden is accelerating. That was well under way before him; we anticipate that will continue.
Canada is in an advantageous place with access to the world’s best market but also highly vulnerable because of our dependency on that market. We think and are trying to urge Canadian decision makers not to waste any time over this. We need to be in Washington almost 24-7 reminding everyone — whether they are awake or not 24-7 — who their best friend and economic partner are. We just cannot give up a moment on that battle.
That will become even more acute — I’ll just wrap up with this — as we shift to a greener economy. We published a report a month or so ago called Green Collar Jobs looking at the millions of jobs already in existence, not to mention the millions more that will be created through the acceleration toward net zero.
Again, Canada is well positioned. We have a lot of engineering talent, design talent, high-skilled trades talent as well that is going to be needed. But we don’t have anywhere near enough people for this.
I was just in Burnaby visiting clean tech companies and they’re all desperate for people of every skill imaginable. So that’s game on for us as well to ensure that we’re attracting people globally but also retraining and reskilling people to those positions to further advantage us in what we think is going to be integrated — and really needs to be — for scale purposes from a Canadian perspective. That needs to be integrated in the North American market.
The Chair: Thanks, Mr. Stackhouse, very much. That’s a good set-up.
Senator C. Deacon: Thank you, Mr. Stackhouse. I enjoyed following you on Twitter and all the insights you bring regularly.
I’m wondering about the role of business investment and Canada’s lacklustre history of business investment in helping to digitize and automate various incumbent industries so that we can accelerate labour productivity growth. As was mentioned by Mr. Kasumovich, there are corresponding regulatory and rule changes needed to enable those new entrants and that investment to get a good ROI. Could you speak to that?
Mr. Stackhouse: It’s a great question, Senator Deacon. It’s lovely to see you as always.
We have an historic challenge of ICT spending in this country, with which you are well familiar. Many things have been tried for that; they’ve helped incrementally. I don’t think anything has moved the dial, so to speak, and it certainly has not done so sufficiently.
We think about those transitions, and this applies to green jobs as well. Many green jobs are digital because the green economy will be connected to the digital economy in all sorts of interesting and necessary ways. We have the engineering talent; we have the skills talent, as I mentioned, but often that’s not matched with the technology. So you get a lower productivity. Even though it’s a productivity lift in this country, productivity in the U.S. and other markets is higher because of a few things, but the higher ICT spend is one of them.
As we think about policies for the recovery, certainly, incentives and diminishment of any disincentives toward ICT spending would be something worth pushing.
We also need to be very mindful of the shifts in value creation, including exports in the economy. We all like to think of exports as being cars and the big steel stuff. We are now or soon will be past the point where commercial service exports are greater in value than automobile exports. Things like financial services, banking and insurance are huge exports for the country. There really needs to be a mind shift, a change, in the country so that when we talk about growth engines of the economy, services — and things that take place traditionally in towers but increasingly are taking place, because of distributed technologies, in basements and studios across the country — are going to be real drivers of economic growth and exports across commercial services. We need to ensure that entrepreneurs — clusters of entrepreneurs as well as large employers of high-value service workers — are not given disincentives from growing and exporting.
Senator C. Deacon: Exports of intangibles. Thank you.
Senator Loffreda: Mr. Stackhouse, it’s always great to see you. It brings back wonderful memories from my RBC days.
You know I strongly believe in immigration. I would like to know your opinion. Is Canada on the right course with respect to immigration levels and strategy? I ask the question because there’s a great shortage on the labour market but also a huge shortage on the housing supply market. Housing affordability has become more and more of an issue in Canada. Do you believe Canada is on the right course with respect to their immigration strategy?
Mr. Stackhouse: Senator, it’s lovely to see you as well. I’ll do an injustice to an important question by keeping my answer brief, mindful of time. We need to be very careful not to conflate immigration and housing pressures. Of course, there is some interaction; I hesitate to say correlation, but it is overstated in a lot of public discourse.
We have enough housing capacity for current levels of immigration at 1% of the population. What we don’t have is housing policies that allow for the dynamic movement of properties and also the creation of housing supply of all kinds. That includes for people who are well established on Canadian soil.
I can’t stress that enough because, given housing pressures in the country, it’s an easy mental leap to immigration. There’s just not a fact base there to show a strong correlation. Better distribution of population? Absolutely, that will help. What’s happened in the pandemic actually is helping that. We’re seeing what we call the “pandexodus” well under way with the creation of stronger housing markets in all sorts of small communities across the country. The economic growth in those communities is really exciting because that will draw younger people. That phenomenon has been under way for at least a decade in the United States. We’ve been much slower. In fact, we’ve had far too much concentration in the three large metropolitan areas. Technology and maybe housing policy adjustments will help distribute it a bit better, but we should continue to strive for that 1% standard.
[Translation]
Senator Bellemare: I’m glad to see you back. I imagine that your 2017 report, Humans Wanted, is still valid in your view. To that end, in terms of the digital and technological skills that we must acquire — according to the surveys conducted, Canadians lack skills and need training — how are you convincing governments, individuals and businesses to increase investments in these skills?
[English]
Mr. Stackhouse: Thank you, Senator Bellemare. I wish I could answer adequately in French. I apologize. I understood your question but will have to keep my answer to English.
We need both quantitative skills, mathematical skills, and what we call the human skills of critical thinking, of communication. We need to blend those. Graduating armies of pure engineers and pure mathematicians creates a very narrow road for the country because many of those skills are outdated 5, 10 years down the road.
There’s tremendous pressure for that. Anyone trying to hire a data analyst or a mechatronics engineer knows just how competitive it is, but we’re seeing the value of those great human skills, which need to be incorporated in STEM programs and in those STEM jobs. We’re seeing a lot of young graduates of 5, 10 years ago flatlining career-wise. You see an interesting spike of income, for instance, for graduates 0 to 10 years out from STEM programs — and this is well documented in the U.S. as well — and then it flatlines because there’s no additive skill, no added value to that person after the age of 30, whereas graduate paths from arts programs tend to be flatter. The pay shows about a $10,000 gap starting out of school — this is in the U.S. — and then it starts to accelerate after the age of 30 because they have that foundation where they can bring in and add lots of skills.
How do we combine those and ensure that the STEM graduates, as well as the arts and the STEAM graduates, come out with good opportunities, fill all those jobs that are in high demand, but, critically, 10 years from now, are able to be the entrepreneurs, the operators, the executives, the managers, the team builders and leaders, the political leaders, who can continue to add value to the country?
A lot of our schools, colleges and universities are working on that, but I stress this because it’s very tempting to turn, in a demand-response way, from the market and start creating very narrow skills-based programs. It’s well intentioned but, as I say, it creates a narrow path. We need a broader path.
Senator Gignac: Mr. Stackhouse, welcome to the Senate.
I wanted first to congratulate you on your recent article, “Eight ways COVID-19 will transform the economy and disrupt every business.” It was well articulated and easy to read. On that topic, what do you recommend to the government to help businesses in this transition in the post-pandemic environment?
Mr. Stackhouse: Thank you, Senator Gignac. There are many, many things that I would recommend but, in the spirit of time, I’ll just continue to stress the need to really push and give incentives to small business to invest in digital technologies. We continue to be a laggard. The pandemic has forced a lot of small businesses to shift. This isn’t about your local restaurant getting on to DoorDash. There’s a bit of this. It’s about all those high-value services jobs, the design firms, the entrepreneurs, who are selling globally through Shopify or Amazon, who have the instinct for this but who often don’t have the tools. That includes public access or good access to broadband.
As we think about broadband access, especially in smaller communities, this becomes a critical investment. You should be able to work in northern Manitoba or Orillia, Ontario, with the same speed and frequency that you would have in downtown Toronto.
Senator Ringuette: Mr. Stackhouse, you spoke about shift change in the global economy. I find there is also a major shift change in the labour market. How can the federal government restructure its policy to enhance upskilling and reskilling? How can that be accomplished in a short period of time?
Mr. Stackhouse: Thank you, Senator Ringuette. Your leadership is critical to this, as is the case for other senators on the line, because this is very much a non-partisan, long-term issue that the Senate can help with.
First of all, we have to see skills and education as a national priority. Of course, there’s provincial jurisdiction, but the federal government has every right and duty to be engaged in these conversations because this is about Canadian competitiveness and prosperity. Most provinces are willing to, I think, work with that.
We’ve stressed this for the green transition. It’s going to be very challenging for us to get to our 2030 targets. I think many people recognize that. We’re going to need massive investments of capital — we estimate $80 billion a year — and most of that is private capital. In the country, we’re only at $20 billion a year right now. Most of that is private. So we need a four-fold increase in capital going into transition activities in the economy.
However, all that money in technology is just going to sit on the shelf if there aren’t the people to put it to work. We need to really press the alarm button for Canada and say, if we’re going to get to net zero, it’s up to not Justin Trudeau or Doug Ford or the heads of corporations, it’s up to the millions of people in the green economy who are going to deploy that capital and technology.
This may sound a bit “motherhoody,” but we don’t have the people right now to get that done. I think that’s becoming increasingly apparent, whether it’s building EV-charging infrastructure across the country, which we have to do massively, almost at warp speed, if we’re to develop the battery plants that we’re starting to build. We’re going to need tenfold the amount of production if we’re going to build carbon capture infrastructure. We’re going to need people by the millions with the skills to get to this. We can’t wait for people to go through the school system or to go through formal retraining. We need a very dynamic reskilling effort.
We have the ability. We have the world’s best system of colleges and universities, in my view, and a private sector that is willing to innovate, and governments, I think for the most part, federal and provincial, willing to innovate. But we have to find a new model, a new playbook for this and create new systems, public, private, federal or provincial, to get us there because trying to do it through traditional channels is just going to move, unfortunately, too slowly.
Senator Woo: Hello, Mr. Stackhouse. Thank you for appearing.
This conversation focusing on domestic investment, business investment and unblocking bottlenecks in the labour market gives the impression that everything we need to do is just domestic.
Do you have a view on the role of Canadian companies going abroad, Canadian outward investment and having a global footprint and how that contributes to some of your objectives we’ve been discussing today?
Mr. Stackhouse: Thank you, senator. It’s a topic near and dear to my heart, as I know it is to yours, and I’m a big believer in Canadians, not just Canadian companies, getting out into the world. That’s why I wrote the book Planet Canada: How Our Expats are Shaping the Future. It is about our 3 million Canadians out there who are an underutilized national asset whom we have to deploy. With the technology, all of us can transcend geography. We’re able to do things globally, morning, noon and night, for better and for worse. That is the spirit of the age that we’re in, and new generations are seeing this.
But how do we ensure that Canadian companies, which are, by definition, greater than the sum of their parts? So a corporation with that multiple value to the people it has, how do we get it stretching abroad? We’ve got a number of new generation companies — you think of the Lululemons, the Shopifys, the Cirque du Soleils of the world — that are now global brands and global operations. But we need new generations of those to stretch.
I would also suggest, getting back to the restructuring point that we have capabilities in this country from auto parts — where we have global champions and Magna and Linamar — but also the greener side of the emerging automotive industry and the resource companies which lost their Canadian identity in the great restructuring of the early 2000s. We need them all to reassert themselves globally as Canada is going to be a world leader in all resource sectors — oil and gas, potash, wheat, on and on — and we need to be the global low-carb and low-emission leader in those areas, which we can be.
Think of the export opportunities there. How do we find our Canadian champions that can be the global leader in a low-emission activity in the resource sector and then become an outward oriented not just exporter but global champion?
Senator Yussuff: Thank you, Mr. Stackhouse, for being here.
I have two quick questions. Obviously, there are a lot of things you’ve listed that if anybody was to be a sane person would look at and kind of throw their hands up. We have a transformative economy, demographic shifts that are happening right before our eyes, we have — [Technical difficulty] — to deal with, technological advances that are going to disrupt most of what we know in the context of how we operate. At the same time, of course, there are huge opportunities in all of these things that you’ve listed and you wrote in your outlook.
Let me touch on two quick questions. One of the largest trading agreements is the EU agreement, the Canada-Europe Union Comprehensive Economic and Trade Agreement. Yet despite the time since that agreement has been consummated, Canadian businesses have not taken advantage of it in terms of exports. We are still relying on U.S. exports as our number one.
The second point is given the technological changes that are coming — recognizing how this can transfer to companies and make them more productive — but at the same time we have this reluctance to invest in the technological chain and to upskill workers to meet the challenges that are coming forward. How do we bridge this conversation to ensure that the advantages we have are not going to be wasted given this challenge we are going to face?
I agree with all the points you made about immigration.
Mr. Stackhouse: Absolutely, senator. That’s an outstanding question.
CETA is painful because, as you know, we have increased our food imports from Europe and not significantly increased our food exports to Europe. We’re one of the world’s best food producers. That’s shame on us.
There’s no simple answer to this. But coming out of the pandemic, one of our concerns is that we have all relied a little too much on government over the last two years. It has been out of necessity. I’m not arguing against what was done, but we need a bit of a wake-up moment to say: Thank you very much, government. You did what governments are created to do. We still need governments involved in lots of areas.
There’s nothing like risk taking, and governments can’t take risks. The private sector does that in large and small ways — more in small ways, like individual risk takers. It’s wonderful.
How do we ensure that those thousands to millions of flowers are blooming as we go into spring? How do we ensure that there’s a tax system, that there’s an education system, that there’s a spree in public conversation that embraces risk taking and those food producers who are willing to go to Europe and sell their cheese or sell their meat against European products? How do we champion the online entrepreneurs who are selling to every corner of the world and ensure that they’re getting what they need?
I know governments all agree with this. There’s nothing to disagree with there. But it takes a certain kind of confidence for a government to step back and say: I’ll take a chance on our people because I think they can do more than we can. If we just give them space, they will do things that we can’t imagine. We’ll give them the support they need, but not so much that it makes them lazy or perhaps a bit hesitant to take those chances. How do we take more risk?
Senator Marshall: In your opening remarks you were talking about vulnerabilities and the U.S. Is there an issue with regard to Canada losing skilled workers to the U.S.? I know a lot of young people are moving to the U.S. Is it an issue? If so, how do we reverse it? If it’s not an issue, how do we make sure it doesn’t become an issue?
Mr. Stackhouse: This is a great question to end on because this keeps me awake at night. Because of demographics and labour shortages, as well as purchasing power in the U.S., they are going to be more competitive for labour, especially high-skilled labour. They always have been and always will be, so we need to keep that in mind.
As the U.S. restricts immigration and we open up, there is going to be even more demand for limited high-value skills right across the board. So we may be seeing the beginnings of a new brain drain there.
Add to that the U.S. ability to invest more in technology than Canadians, and it becomes a dynamic that puts Canada even further behind because a typical U.S. firm will spend more on technology and get that special skill that creates that magic combination while we rely on a lower-paid, slightly lower-skilled and lower-capitalized-through-technology person. As I say, we will fall further and further behind. We need a comprehensive approach, a federal-provincial approach. But it’s also labour and technological capital that we need, and to be mindful to keep that talent as well as attract talent from every other corner.
The Chair: Mr. Stackhouse, thank you very much and our apologies for the technical problems but it was worth the wait. Thank you.
Mr. Stackhouse: Let me thank all of you for your service to the country. It’s always so impressive for me to get to spend time with you. I am humbled by not just the extraordinary talent but the commitment to the country. I don’t say that gratuitously. I want to thank you all.
The Chair: John Stackhouse, Senior Vice-President, Office of the Chief Executive Officer of the Royal Bank of Canada.
We will return our attention now to crypto-currencies and the issue of regulation and where Canada — we heard from Marcel Kasumovich a little bit earlier on, the importance of innovation, that innovation led to the birth of crypto-currencies and that Canada has the potential to lead in this particular area.
We welcome now and thank you for your patience to our final guests tonight. Joshua S. Gans, Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship and Professor, Strategic Management, Rotman School of Management, University of Toronto.
That’s a long title and thank you and welcome, and thanks for your patience in being here.
Do you have a few brief opening remarks you would like to share?
Joshua S. Gans, Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship and Professor, Strategic Management, Rotman School of Management, University of Toronto, as an individual: Yes, I do. I’m an economist and professor at the University of Toronto. I’m also the Chief Economist of Creative Destruction Lab and the leader of Blockchain stream.
Thank you very much for inviting me here tonight. It has been approximately eight years since I last testified before this committee. At that time, I urged the committee to consider options for establishing a digital crypto-currency that was pegged to the Canadian dollar and that would generate potential demand for Canadian currency for uses of medium and exchange around the world. Since that time, crypto-currencies have evolved and devolved. Absent government action, private actors have set up what are called stablecoins that are pegged to fiat currencies. These stablecoins proved attractive as a means of allowing people to purchase non-fiat crypto-currencies such as bitcoin, ethereum and so on.
These stablecoins are not regulated and are purportedly backed by stable assets valued one-to-one with fiat currencies. While that means that such coins are likely to be stable in normal times, when there is stress on the financial system, these could easily become unstable. This is the same situation that banks faced in the era of private currency in North America almost two centuries ago.
There is a significant opportunity available for the Canadian government to establish a Canadian dollar stablecoin backed by deposits held with the Bank of Canada. This could be given to private operators who hold reserve accounts just like banks do today. More ambitiously, these accounts could be held by any person providing an alternative to banks for basic transactions.
Complemented with the right technology, this would go a long way toward banking the approximately 1 million Canadian residents who are unbanked. It could also establish flourishing international remittance markets and significantly lower transaction costs for Canadian consumers and businesses. Put simply, basic digital payments should be frictionless. The technology now exists to scale that in a secure manner. It will offer Canadian policy-makers a unique, high-frequency lens on the economy as well as broadening financial inclusion. There are many ways the system could be built and evolve. I’m happy to answer any questions you might have.
The Chair: Thank you very much for those remarks.
Senator C. Deacon: Thank you, Professor Gans, for being here.
I worry about you being back here again in 10 years and we have not made the progress we could make. I want to focus on tactics we could use to start to build confidence among those who are in charge of many decisions, like regulators, procurement folks and others. I wonder about the role of regulatory sandboxes that bring regulators, policy-makers and procurement folks together with innovators to understand the risks and understand how to identify and manage risks they may see and build momentum. The U.K. just made a big announcement in this regard.
I wonder what your thoughts are on the usefulness of that as a way to start to build understanding and awareness.
Mr. Gans: I think that is actually that is absolutely essential. You couldn’t switch on a Canadian dollar digital currency, public or private, overnight. I think that it would behoove any such [Technical difficulties] — to think very carefully about the initial purposes of it. I don’t have any particular ranking in mind but let me give you an example.
We have just been through the COVID-19 pandemic. Billions of dollars were sent in cheques to Canadians, sometimes direct deposits into accounts and things like that. One could imagine that those payments that were being made could easily have been done through bank account holdings with the Bank of Canada that the individuals had.
Moreover, if those were linked to key information, you could easily target those payments, in particular, sectors, demographic groups, people who had a student status or didn’t have a student status. You could imagine all of those things. The idea would be that you wouldn’t actually have to, for instance, leave your house in order to access those payments. That’s one set of uses.
One could imagine other pilot schemes which might be evolved in using Canadian digital currency to deal with payments for government services procured by businesses of any size, especially smaller businesses.
Again, it could be this direct route. This could, of course, be in complement with the existing banking system. I must stress that it is not my agenda at all to replace the existing banking system. What I am interested in is reducing frictions as much as possible. I came to Canada 11 years ago from Australia, and Australia, to be frank, had a far more sophisticated technological financial system than anything I have encountered here. I don’t think in the last 12 years we’ve got to this situation in Canada that was as good as when I left in Australia.
There aren’t many situations where Canada does lag Australia but this happens to be one of them. In fact, so much so that when I was first interviewing for a job and brought my family out here and we had to have lunch, it turned out that I didn’t have enough Canadian dollars on me and the system wasn’t set up. I didn’t have an Interac compatible card, and we had to halve our lunches because we didn’t have enough right there. That experience — I’m a well-to-do person — of facing some frictions because you don’t have the full suite of banking services is something that still dogs many Canadians, as I understand it, especially ones who have international ties and other things like that. I think the technology has evolved such that the government could have a role of sponsoring a dramatic lowering of transactions costs.
The Chair: Thank you, that’s some tough love there, tough words. I appreciate them.
Senator Woo: Thank you, Professor Gans. When I put exactly the question that you touched on tonight to our central bank witnesses at an earlier hearing as to what might stand in the way of developing a stablecoin connected to the Canadian dollar, the answer was that we have to wait until the use of cash is less prevalent, and in fact, they’re monitoring the use of cash and will not take that step until they feel that cash is no longer as important in the economy. What do you say to that response?
Mr. Gans: My response is: Why is cash still relevant? That is telling me the symptom of the disease, not the reason not to intervene.
I was actually — I was going to have a little stunt where I showed you some cash and pointed out some stuff for one part of my talk, but I don’t have any. I haven’t seen cash for two years, but that’s just me. But I think people do operate in cash — I know they operate in cash because when people come around to your door and ask for charity donations, it’s very difficult to use anything other than cash for that purpose.
I think the cash economy has been something that people have relied upon, and for good measure, obviously, but I think less so. Again, this is something that I would target in terms of use cases.
I suspect if you were to offer again a Canadian digital currency tomorrow, it would not be people who are used to cash who will take it up first. It will be other people, no doubt about that. People who use cash no doubt have reasons to do so. But the goal is to gradually wean people off it. Credit card companies and banks have been trying to sell us on anything other than cash for a long time, and they have been effective at it. Cash is risky. Frankly, in terms of operating a democratic fiscal system, cash creates two things. One is it allows you to pull your transactions, income and otherwise, out from government observation. But at the same time, that increases the desire of governments to monitor what is going on with regard to digital cash. You see this sort of counterbalancing of intrusion and exclusion going on.
It seems to me — so now I’m speaking with my entrepreneurial hat on — when you reduce frictions people come. It’s amazing what frictions can cause. If cash is being used now, it is because we have not got an alternative that involves less friction. But we know that technologically that ought to be the case. It ought to be more secure. It ought to be more able to give people information about how much they’re spending and how they can manage their finances.
Again, to reflect on the COVID era, we have seen massive asset price inflation because during the first year or so of COVID, people dramatically reduced discretionary expenditures. I don’t think we knew as economists how much of that there was. I don’t think people knew how much of that there was. They could reduce discretionary expenditures and all of a sudden find it desirable to — and be able to — afford a more expensive home. I think this information is lacking, and it’s lacking because a lot of the basics are still going under a cash economy, and as a result of that, it’s just not giving people the information on their own budgets of what they’re spending.
The Chair: Thank you for that.
Senator Loffreda: Thank you for being here to our panellist. An important purpose and goal of every government is to improve the quality of life of their population. How would the accelerated usage of crypto-currency improve the quality of life of Canadians? I read a lot about crypto-currency, interesting research and studies, where some are saying it will benefit the wealthy to a much greater extent; the rich will get richer. To your point on where cash is risky, if I look at crypto-currency, in March 2020, for bitcoin the drop was close to 50%, and in May 2021, the drop was close to 53%. So I would say it’s just as risky as cash to a certain degree. I would like to have your insight on that.
Mr. Gans: What you say about crypto-currency is 100% true. It is more likely to benefit the rich and less likely to benefit other people. I will put it not kindly: Currently, non-fiat crypto-currencies are basically a casino attached to the economy. It’s as if people set up computer games to play a game and those games are zero-sum games. They might not be zero sum for Canada as a global game, but they’re zero-sum games. So much of what we see is not creating economic or financial value, but is, fortunately, just a sideshow. If it ever became more than a sideshow, we’d be even more worried.
I don’t come here to advocate for the use of crypto-currencies. I think they are interesting, I think they have evolved, but I think they have been talked about by crypto enthusiasts who stress all sorts of properties that are associated with them that have not been borne out in practice.
That said, they have shown us the way as to how you can create digital assets. This was developed a long time before bitcoin, maybe some 30 years ago, by Stuart Haber and W. Scott Stornetta when they invented the concept of the blockchain. Now that is something that is very interesting and is proven. If crypto-currencies have given us anything, they have proven it is possible to create a secure payment system without a government or a large bank or something else stepping in. Is it a good payment system? No, it is not. Is it an efficient payment system? No, it is not. But is it a payment system that hasn’t been brought down by the usual criminals attacking it? Yes, but around it is a hive of infamy. It’s profoundly unsafe.
When it comes to crypto-currencies, there are issues that are beyond the control of any government because this show is going on.
How to account for it and rein it in is another reason I advocate for a government-sponsored digital currency of some kind because it will compete with these other forms of payments and keep them as a sideshow. That’s what we need to do, and then we need to have the technology exploited in a sensible way.
The Chair: Thank you.
Senator Bellemare: Thank you very much, Professor Gans. I want to ask you a concrete question for my understanding. If we had a central bank digital currency, would that mean that we would need miners to mine the currency, or are we talking about a different kind of product?
Mr. Gans: I can tell you precisely that. For my sins working with the Creative Destruction Lab, we were, while it existed, a partner of the Diem Association. We weren’t a very active partner, but we were partners, so I got to see what they were doing. I will tell you this: No, you would not have a crypto-currency based on what’s called proof of work using electricity. That was something that was done.
It shows you how easy it is to release a rabbit from a hat and not be able to put it back in. There are different models of this, and likely it’s a situation where you had a number of trusted actors who would be the nodes of the network to ensure that there is a consensus on the network.
Now, that could be done in a number of ways. For instance, you could have each provincial and territorial government, with their own finance departments, operating a node in this network. That would be one way to do it. You don’t need that many. You just have them do so. You could have the current licensed banks be nodes of the network as well.
The point is that the cost of protecting and securing the network is all because of a desire to have anyone participate. I cannot imagine a situation where a government-backed digital currency would do that. Permissions would be granted; you will have trusted entities, and no one entity would have enough power to manipulate the network. It would just be an operational role.
Senator C. Deacon: I have one last question. Looking at the role of bitcoin as a payment rail, what regulatory guardrails do you think would need to be put in place? I’ve certainly learned a bit about a strike on the Lightning Network and how it uses bitcoin as an instant payment rail, anywhere in the world, converting from one local currency to another local currency instantaneously. I compare that to our multi-year challenge in Canada of getting real-time payment rails in place. What insights do you have in that regard?
Mr. Gans: They have their own guardrails in place that has stopped that being in use. With bitcoin, in particular, the transaction times are slow and the currency is volatile, as has already been mentioned.
In principle, blockchain-based crypto-currencies could be very fast and perform this function. The tough part is getting in and out of it, at the moment, because there is uncertainty regarding tax status. What are these things? Are they assets? Are they currencies, et cetera? In some jurisdictions — and I admit I’m not a tax expert — you’re supposed to report to the taxation department every crypto-currency transaction. I don’t think the Canada Revenue Agency would want to know every time I bought a cup of coffee. There are some things that need to be worked out in that regard.
I would not hold my breath to do it with bitcoin. Bitcoin was the initial proof of something that works. I think there are plenty more superior technologies out there that could be better test pilots for a Canadian system to allow for remittances. Even so, again, I think a Canadian or a government-level scheme could do much better. I should be able to send money for a birthday present back to Australia instantly. There is nothing conceivably stopping that, and that’s what the tokens allow.
Now, the antiquated system of bank reconciliation, it was born centuries ago, and we have not changed the fundamental principles. Crypto-currency has shown us that we can do better.
The Chair: Isn’t that the point? We’ve heard from other witnesses that the reason this is appealing is because it allows, 24 hours a day, 7 days a week, 365 days a year, you to have these transactions, and you’re not reliant on an antiquated system, and it can be all of the above. It can be an asset or an investment or a currency, just the way a dollar is today.
Mr. Gans: Yes. That is absolutely correct. That was the actual goal of the Diem Association. They tried very hard to work with regulatory agencies. Unfortunately, private actors, like that consortium, have been discouraged by that. Now we’ve only got the players who don’t care about dealing with governments, who want to do things independently of it. We’re in a bit of a mess from that perspective. There needs to be proactive government engagement on this. I didn’t hear the testimony regarding cash, but I would not agree; that seems to me to be misguided.
The Chair: To Senator Woo’s point, though, when we have talked to government folks about regulating and getting into stablecoin, they talk about timelines that are too late — too little and way too late.
Mr. Gans: Yes. There is a chance that a private actor will work out how to do this properly, legitimately, and that there will be no control. It will move. Currently, that is the most likely scenario. Again, I know from the reception that the Diem Association got from central banks around the world that there is no rush to do anything. I do understand that from one perspective. Every time we decrease friction for something, that creates a period in which people are still sorting things out. That’s unstable. Central banks do not like instability, but, unfortunately, I think there is no choice.
Senator Woo: Can you tell us anything about the Chinese experiment during the Olympics with the yuan?
Mr. Gans: No, I’m sorry, I can’t. I should mention that they were able to use just messaging systems to send money, digital payments, to people. It turns out that there are ways to do this. Proactive engagement would really get dividends quite quickly.
The Chair: Thank you very much, Joshua Gans, the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship and Professor of Strategic Management at the University of Toronto, and the Creative Destruction Lab.
Thank you very much to all of our witnesses tonight. We’ve really covered a lot of ground, despite some technical issues.
It will be three weeks before we meet again. There will be messages from the clerk on that. For my colleagues on steering, we will try to have a meeting in the next couple of weeks to plan forward.
Thank you all very much, and thank you to those watching us online. We’ll see you again next time. Thank you.
(The committee adjourned.)