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

Issue 7 - Evidence - April 3, 2014


OTTAWA, Thursday, April 3, 2014

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

Senator Céline Hervieux-Payette (Deputy Chair) in the chair.

[Translation]

The Deputy Chair: Good morning; I call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order.

Today, the committee is holding its fourth meeting as part of its study on the use of digital currency. The committee has heard so far from the Department of Finance Canada, an economic historian, a professor at the Rotman School of Management at the University of Toronto, and the Bank of Canada.

During the first hour of this meeting, we will receive a presentation from Mr. Jeremy Clark, assistant professor at the Institute for Information Systems Engineering at Concordia University. Mr. Clark's research interests include applied cryptography, Bitcoin, and security in network communications. He has contributed to many projects and publications in these fields.

Mr. Clark, on behalf of the committee, welcome. My particular thanks for accepting this invitation to appear before us. I am sure that you have all the skills you need to help us better understand the subject we are studying.

[English]

Jeremy Clark, Assistant Professor, Concordia Institute for Information Systems Engineering, Concordia University, as an individual: Thank you. I have some prepared remarks to make, and then I will move to questions and answers.

Honourable senators, it's my pleasure to present to you today on the subject of virtual currencies. My background was mentioned, but I will just remind you that I am an assistant professor in Information Systems Engineering at Concordia University. I received my PhD in 2011 from the University of Waterloo. My research is in the areas of cryptography and cybersecurity.

Given my expertise, I feel I can best assist you by providing the technical details of how bitcoin and other virtual currencies work, with a particular emphasis on the math-based currencies like bitcoin. Bitcoin has been a research area of mine for several years. I am not an economist, nor do I have extensive public policy experience; however, it is my belief that successful regulation in these other areas requires an accurate understanding of the technology.

If we broadly define digital currencies, we may include things like online credit card transactions, Interac by email, online bill payments, cashing cheques with a camera phone, et cetera. It is important to note that each of these consists actually of two transactions. There is the digital transaction that we see as users, and this merely authorizes the payment. Then, behind the scenes, a second transaction occurs that actually moves the money around. It actually settles the account. This second transaction is not necessarily a digital transaction. Therefore, I would consider these digital authorizations, not necessarily digital currencies.

In contrast with the class of what I will call math-based currencies, in a digital transaction the user initiates, authorizes, clears and settles the transaction. The currency actually moves from the sender's account to the receiver's account.

The pre-eminent math-based currency is bitcoin. However, it's a large umbrella that covers other established currencies like ripple, litecoin and peercoin, as well as new experimental currencies like mastercoin and ethereum.

I will go through a couple of the major properties that bitcoin has. Many of these are shared with other math-based currencies. In certain cases, you will need more context to judge whether these are good or bad properties. I will neutrally say what the properties are and you can interpret them however you like.

The primary property that bitcoin has is a decentralized ledger. To understand this property, it's important to understand that bitcoins aren't bearer instruments in the sense that you cannot possess a bitcoin, digitally or otherwise. What you possess is a cryptographic key that gives you signing authority over an account. You can think of accounts as having a unique number. I'll refer to them as bitcoin addresses. Technically, they correspond to a public key in a digital signature scheme. The ledger keeps track of every inflow and outflow associated with every bitcoin address, and every outflow has to be signed for by the person who has signing authority over that account. The ledger is updated and maintained by a decentralized network of computers, and there is no entity in charge of this process. That's why I called it a decentralized ledger.

The second property is that bitcoin uses secure cryptography. From my work in cryptography and reading the literature, what I have seen is that cryptographic algorithms, when they break, tend to do so slowly over many years, with theoretic attacks eventually leading to practical attacks. In terms of the specific cryptographic primitives that bitcoin uses, we haven't seen any indication even of theoretic attacks against those primitives. That said, it is unlikely to remain secure forever, so if we think long term, maybe five decades or something like that, it may be time to transition the encryption algorithms that underlie the currency, but that is completely possible with the way the currency is set up.

The third property is short transaction delays. Transactions first require an Internet connection. As an aside, this is the reason why I don't think bitcoin will ever replace standard currency or ever become the national currency of any country. Given that you have an Internet connection, you send your transaction to the network of computers that are maintaining this decentralized ledger. Just like email, you can do a bitcoin transaction any time of day or any day of the year. After you hit send, the network learns of the transaction nearly instantly. The transaction will be grouped together with other active transactions, and the transactions set, which is referred to technically as a block, will be added to the ledger of all transactions, which technically is called a block chain. This process typically takes 10 minutes. It takes about 10 minutes to bundle together all the transactions and add them to the ledger. Within an hour after sending the transaction and having it added to the ledger, the transaction will be deep enough in the ledger that it is highly unlikely that it will be subject to a reorganization of transactions. Reorganizations do tend to happen, but they happen right at the tail-end of the ledger.

The bottom line is that transactions can be recognized instantly and finalized with high certainty within an hour. As a party to a transaction, you can choose to wait only for the transaction to reach the network, or, if you want, you can wait the full hour for full confirmation, or you can wait any time in between. The decision basically comes down to how much trust you have in your counter-party. As I mentioned, the transaction actually moves the money. Even at an hour at the longest, that's a very short transaction for something that actually moves and settles accounts.

The next property is low transaction fees. Fees for bitcoin are technically voluntary; however, popular bitcoin software, by default, will include fees. The way that you calculate fees is a very nuanced calculation, but you can think of something like five cents for a standard transaction. The fees do not depend on how much bitcoin is being sent. They only depend on how big the digital representation of the transaction is — how much work the computers have to do to process and verify the transaction.

Low transaction fees enable everything from remittance and overseas workers sending money home to things like micro-transactions. You can imagine paying 10 cents to read a newspaper article online.

The next property is that transactions are irreversible. Once the transaction is in the ledger, it can't be reversed even if it's widely known to be, for example, stolen money. However, because there is a ledger-based system, transactions are traceable. There are cases, for example, where money traced to a theft was deposited with a web service and the web service promptly returned it to the original owner.

The next property has to do with anonymity, and this is one of the most misunderstood parts of bitcoin. The term we use is "pseunonymous." We say that transactions are pseunonymous or pseudononymous. As we've established, transactions are associated with an account number or a bitcoin address. The link between the address and the account holder is not known by default, however it can be established. Many users or companies will say what their bitcoin address is so they can receive payments. Other people might purchase things with bitcoin and have them shipped to a physical address. Now you know the link between the physical address and the bitcoin address. There are also more indirect methods of linking addresses to identities. As mentioned, bitcoin transactions are sent from a computer and computers, when online, have a pseudonym, which is an IP address. Internet service providers maintain a link between which customers have IP addresses and at what time.

There is interest in both strengthening and weakening bitcoin's anonymity, depending on your perspective. Arguments in favour of strengthening it would be to provide better consumer privacy and protect businesses from corporate espionage or the fact they are basically opening up their books to all their competitors to look at their inflows and outflows. The arguments in favour of weakening it basically come down to allowing law enforcement to do their job more effectively. The way I think of it is this: Bitcoin is more anonymous than the banking system but less anonymous than cash.

The next property has to do with mining. "Mining" technically has different definitions, but I mean "the minting of new currency." This is also a misunderstood property of bitcoin, I think. Mining is not at all a central component to bitcoin. In fact, bitcoin is designed to work without mining at all. Mining simply solves the problem of whom you give the initial set of bitcoins to in a fair and equitable manner. The decision of the designer was that they would give it to the computers that were doing the work and maintaining the ledger. However, when you look at how this is actually used, these miners tend to subsidize the transaction fees that they're charging; so really it's the end users who are sending transactions that benefit the most from mining.

The inflation rate is programmed into the currency, so bitcoin mining is capped. This is a design decision of bitcoin specifically and is not inherent to math-based currency. If you didn't want a cap on the amount of currency and wanted it to inflate forever, that's something you could totally do. With bitcoin, the cap is 21 million bitcoins. This is sometimes misinterpreted as 21 million units of currency. You should remember that bitcoins are divisible to eight decimal points, so what you really have is 2.1 quadrillion units of the smallest transactional amount.

The final property is one we are still coming to grips with as researchers: The fact that bitcoin gives us what we call "programmable money." A cheque has a "To" line. You have two choices for it: You can leave it blank, which says that anyone can cash it; or you can specify a single person and that single entity can cash it. With bitcoin, in the "To" line you can write a little computer program that describes sets of or the properties of the entities that could redeem the transaction or the exact set of conditions under which this redemption would be possible. This leads to all sorts of novel applications — escrow transactions, two out of three signatures, bonds, payments for computation and other things that sometimes are called "smart contracts."

This is currently a very active area of development with math-based currencies. I don't think we understand the full potential of what this will allow at this time; it really is a new paradigm for currencies.

That concludes the properties I wanted to mention. I know that the interest in this room is mainly on points of regulation, so I will say where I think regulation may be appropriate. This isn't my opinion as I'm not encouraging anything. These are areas that people have identified as potential points of regulation. In terms of consumer protection, the signing keys that give you signing authority are frequently stolen. They are typically on your computer and if you get malware or someone hacks your computer they can be stolen. Consumers will go to the local police in the case of theft but local police probably don't want to deal with these types of things. It may be interesting to think of better options for people who have their keys stolen. There are exchanges with currencies, like fiat currency and Canadian dollars, into bitcoin. They go bankrupt more often than we'd like, so we could think of bankruptcy insurance or some security auditing of these firms.

There are no guarantees that the exchanges are providing the best execution of orders, so we may want to look at establishing market rules for exchanges. Exchanges sometimes operate in a data centre, so that means the exchange is basically a website that is hosted by a third party.

There was a case recently in Ottawa where the data centre gave unauthorized access to the exchange computer resulting in a theft of $100,000. We have to think about what kind of liability we want data centres to have for hosting exchanges as well.

In terms of money laundering, I can use bitcoin to move large amounts of money overseas. There are no limits on the countries as bitcoin doesn't have any concept of countries or borders. In order to get bitcoins out of Canada, typically it would be in cash. I would have to go through an exchange in order to turn them into bitcoins. You can consider exchanges to be money service businesses and then make them subject to the standard laws, like know your customer, and report certain types of transactions, et cetera.

In terms of illicit transactions, it's important to remember that bitcoin transactions are packets on the Internet. They are no different than other types of illicit packets that law enforcement is interested in tracking. They are already involved in lots of cat and mouse games tracking illicit information on line. The most notable case for illicit transactions is called Silk Road, where you can purchase illegal things like drugs and weapons. It is important to know that in the case of Silk Road, bitcoin was a component of a larger system. If you just had bitcoin, you couldn't do Silk Road because you also need ways of anonymizing users in terms of their Internet traffic.

Basically, you have to put a server up and have it so that no one knows where it is located. Somehow you can visit the server over the Internet and not know where it is located. That uses a highly sophisticated piece of technology called Tor:Hidden Service. If you want illicit things shipped, you probably want them shipped to an anonymous address like a post office box. Silk Road is an example of a combination of technologies that came together in order to make that possible. Of course, law enforcement was able to get to the bottom of it and make arrests in that case.

The final category is taxation, about which I know the least. I guess I see it mainly as a classification issue: What does bitcoin fall under? I'm not sure what the answer is. Economists would probably have a better opinion than I would have on that.

In conclusion, we are in the early adopter phase of math-based currencies. It's hard to assess their true potential at this time; however, a low-fee, international pipeline for financial transactions that is akin to sending an email is an important innovation in and of itself without getting to the more futuristic possibilities of a programmable currency. Small businesses in the sector are growing with significant innovation happening right here in Canada. We have to be careful not to stifle innovation, while addressing the legitimate concerns banks and law enforcement have with math-based currencies.

The Deputy Chair: Thank you. In trying to follow you, I hope my colleagues have picked up all the points that you raised. We may have a few questions to clarify these points.

Senator Tkachuk: That was quite remarkable, actually.

When you talked about the payment and the fact that it takes 10 minutes to finally move the key that I have or a portion of the key that I have or the asset that I have to somebody else, can you make multiple payments? Can I pay three things at one time or do I have to make every transaction separate? How does that operate?

Mr. Clark: The basic rule is you can do multiple payments and bundle them together. The way it works is with inflows and outflows. In a transaction there will be a bunch of money that comes into the transaction and there will be a bunch of money that comes out, so you can think of it as input addresses and then output addresses. If you're paying five people from five different accounts you can put that together in one transaction. You will probably get lower fees by bundling together so it's an advantage to do that.

The only rule is that if you have an input you can't send it to two places at once. That would be called a double spend, and it's obvious why you shouldn't be able to double spend. When the computers update the ledger they are ensuring that when an input comes into a transaction it hasn't been spent in any other transaction.

Senator Tkachuk: The bitcoin itself has such big valuations and it moves up and down. Why does it do that? It seems to me, if I'm paying for a piece of digital currency, let's say I pay $100 for a bitcoin and so I put in that much cash. I need cash to get a bitcoin, otherwise there is no bitcoin, so I pay $100 for it. My view is that $100 is now stored in that bitcoin so it can be released to someone else who I'm buying something from. Why does it increase or decrease in value?

Mr. Clark: I don't necessarily view it as being stored. That's one way of thinking about it. Let's go back to where the bitcoin that you buy for $100 comes from. In the very beginning it will be mined by a computer, which means it just comes out of thin air, essentially. This bitcoin comes out of thin air and then if there is a demand for bitcoin someone will pay $100 for it and so the miner will sell that for $100. Then you'll spend that bitcoin, someone else will have it and maybe they will sell it later for $150 or the price will change. The price is closer to about $500 for a bitcoin.

It's like a commodity, I suppose, from that standpoint. As to why the exchange rate is so volatile, I'm not sure we know. First off, you have to figure out who is holding bitcoins and why. It doesn't pay any interest, for example, so why would you hold bitcoins instead of holding cash if you're not going to earn interest? Some people might argue it's deflationary, so that you might expect a rate of return. A lot of people are just speculators; they think that the price may increase and so that may be why they hold onto it. We don't know the answers, but the answer to that question may lead us to being able to model the volatility better.

Senator Tkachuk: I find it difficult. Commodities are something. There has to be some input into commodities such as corn and oil, there has to be some cash or something to create something real so people eat or whatever. With this thing there is no input except it's produced. As you say, there's nothing there except what I'm willing to pay for it.

Mr. Clark: Right. I think maybe what it derives its value from is scarcity, so you can't just go out and make a string of bits that is equivalent to something that would be a bitcoin. Because it's scarce, that may be where it derives its value from.

Senator Tkachuk: Can you deposit bitcoins anywhere else outside of the ledger? Are there any banks that actually take bitcoins?

Mr. Clark: There are no banks that I'm aware of that take bitcoins. It's possible that they exist in other countries.

There are exchanges online. Bitcoins and fiat currency are deposited with the exchange. They hold it in street name and then the transaction moves the money from within their own company, from one customer's account to the other person's account.

There are other services that will hold your bitcoin. This is more of a convenience for users so you have easy access to your bitcoins if you sit down at a new computer and your bitcoins are on one computer. If the signing authority over the bitcoins are on one computer and you want to use it from a second computer, that's a substantial problem. It's more addressed at solving that problem as opposed to them actually wanting to hold your bitcoins, for example, to loan them back out or whatever a bank might do.

Senator Massicotte: I think I heard you say that there is no question that the small "b" bitcoins could never be our national currency and I think I share your pain. I know it has become very popular, but why is it so popular? For instance, I hear people say that it's very cost efficient and less expensive. I'm not sure that's the case because obviously the retail price has to change immensely. The retailer doesn't deal with bitcoins and he's probably charging 5 per cent or 10 per cent more. Even when you set off the account and you go to an iCloud or you want to fix the currency that's going to cost you something.

Is it a false argument to say it's cost efficient? That first step is very efficient but there are all the other steps you need to cause a transaction. I'm not sure it's cheaper than a debit card.

Mr. Clark: There are companies and their business model is to basically provide a bitcoin pipeline for companies so that users just pay in Canadian dollars, it gets converted to bitcoin on the back end, sent through bitcoin and then the company immediately converts it back to fiat. There are fees associated with moving Canadian dollars into bitcoin and then back the other way.

Those fees tend to range from 0.5 per cent to 1.5 per cent, and so I think it's still lower than credit card payments and maybe debit payments. I'm not an expert. I don't know all the numbers.

Senator Massicotte: Debit cards are very cheap. It's a fixed cost per transaction of 10 cents to 18 cents.

When you go to a convenience store to buy a pack of gum you're not going to wait 10 minutes — so you can't use it there.

On the issue of being anonymous, that's also, as you confess, somewhat false. There is actually a tracker. If it's extremely important they can find out. Maybe the drug dealer or whatever has been using it under a false pretense that he thought was totally anonymous and he's finding out, oh, oh, look at the FBI recently, they shut down.

What is the eventual life of this stuff? I know it's very popular now and I suspect the retailer who is using this, including the car dealer, because it's more marketing oriented. It's not oriented at all to fundamentals. Do you share that opinion?

Mr. Clark: Maybe to a certain extent. If you look at the demographic of people who are willing to use bitcoins that is an interesting demographic, and so it's totally possible that companies are using bitcoins just to appeal to that specific demographic.

In terms of going to a store and waiting 10 minutes to buy a pack of gum, that is a drawback. The 10 minutes is a design decision by bitcoin so that doesn't necessarily apply to other math-based currencies. The reason that you have to wait 10 minutes is — it's a very technical discussion — essentially you're worried that the consumer is going to do this elaborate theft where they try and double spend, so they give you the bitcoins for the pack of gum and then they also send it back to themselves at the same time and you don't know which of those two transactions is going to make it into the ledger. They compete, they contradict each other and they both can't go in.

In the case of things like packs of gum, you probably trust your consumers enough that they're not going to do this elaborate hoax, and they could simply walk out with a pack of gum. There are easier ways of stealing a pack of gum probably than launching this bitcoin-based theft.

Generally there are small businesses that do accept bitcoins for things like cupcakes and that type of thing. They essentially trust the consumer that they're not going to double spend and so they wouldn't wait the full 10 minutes. They will just see that it was broadcast to the network.

Senator Massicotte: National currency is out of the question, so it's a convenient form of bartering; it's a commodity oriented form of bartering. Maybe there is a cost advantage, which is not clear to me because the variability of price is scary. Those motivated by anonymity maybe should be concerned, as the Senate should be concerned. What's the next step? What's the national interest? Why would we as a body recommend any form of regulations? It's buyer beware.

That guy is buying silver or gold or whatever. The government doesn't guarantee that they won't lose money. You mentioned five or six places where we could legislate, but why get into this? Where's the national interest?

Mr. Clark: I think it does go with the cost advantage, but it's not for the types of transactions that you're thinking of, the mainstream transactions. There are other transactions that are much more difficult to do. For example, if I want to send money overseas, my brother lives in Kiev, Ukraine. If I want to send him some money, that's really hard to do with the banking system. There will be large delays and large fees. I can send him bitcoin. Even if it takes 10 minutes or an hour for it to fully clear, that's still a very fast transaction, and there are low fees. For things like the remittance market, it's interesting in those cases.

Generally, if you think about the Internet, it's purely digital, and it doesn't know international boundaries. This is a currency that I think is perfectly designed for, basically, transacting online.

Senator Massicotte: Especially in countries in which there's a significant inflation in currency, you can't trust the local currency or you think the fees are a disadvantage. As you know, the more you regulate and try to achieve the same form of comfort that you get from national currency, there go your fees again. Even then, if you send it to your brother-in-law in Bulgaria, I'm not sure it will convert the bitcoins into real currency to buy a pack of gum or whatever.

Mr. Clark: That's correct. You do need to find an exchange on the other end to convert it for it to be useful, or you have to transact directly.

Senator Black: Dr. Clark, thanks for being here. That was very helpful. It was helpful in terms of the technical discussion, but I want to take you, if you're comfortable, to a discussion about what the future might look like.

From the very end of your comments, I take that you believe that bitcoin is likely a step on the innovation road for digital currencies. Do you agree with that?

Mr. Clark: Yes, I would agree.

Senator Black: Let's go down that road a little bit. What role do you see digital currencies playing in the Canadian economy three to five years from now?

Mr. Clark: I think they'll have a more prominent role to play, especially for online transactions. We have seen some major retailers start to accept bitcoin. TigerDirect is one that has a Canadian presence. I think you'll be able to go online and buy things with bitcoin on more sites than you can today.

I mentioned the programmability of money. That's maybe more than three to five years out, but I think we'll see other currencies that really enhance that feature of the currency. Whether that's added to bitcoin itself or there's another currency that comes along and replaces it, I think there are exciting opportunities in that space as well.

Senator Black: I take from that that you don't see digital currencies going away?

Mr. Clark: That's correct. I would be very surprised, at this point, if they would go away, unless there were draconian measures taken by governments to shut them down.

Senator Black: Right. In terms of Canada's position, is there an opportunity for Canada to play, globally, some kind of role? Is there a first-mover advantage to Canada, in your view?

Mr. Clark: It's sort of a double-edged sword because, if you regulate and get it wrong and don't have the opportunity to learn from what other countries did in terms of regulation, it's dangerous. On the other hand, once you get regulations in place, I think it gives a lot of confidence to entrepreneurs who want to innovate in the space. Right now, there are a lot of question marks around it. They have trouble dealing with traditional banks just because it's sort of up in the air. So I would say that there is a first-mover advantage in terms of instilling confidence, which will lead to entrepreneurship, which will lead to innovation for the Canadian economy. As I said, there's also a risk to moving first.

Senator Black: Dr. Clark, are you aware of something called the mint chip, a digital currency developed by the Canadian Mint, apparently?

Mr. Clark: Yes.

Senator Black: Can you share what you know about that?

Mr. Clark: I don't know all of the technical details of it. My understanding is that it's still based on Canadian currency. It's not a digital currency; it's just a digital representation. Earlier, I mentioned what I consider digital authorizations. I consider it a system that's based on authorizing payments digitally and how that money actually moves around. I haven't looked at the details, though.

Senator Black: You understand that it would be a process as opposed to a currency?

Mr. Clark: Yes.

[Translation]

Senator Bellemare: I have two questions for you; here is the first. Yesterday, we had people here from the Bank of Canada; they talked to us about bitcoin as a store of value. We all know that bitcoin is highly volatile. They also told us that, in some countries, there are private organizations like BitPay, which are in the business of quickly converting bitcoin to the local currency. Are you at all familiar with organizations of that kind?

The Bank of Canada people told us that bitcoin is used a lot as a payment method and that people who use it internationally convert bitcoin quickly so that it does not lose value.

Are you at all familiar with organizations like BitPay? How do they make their money? Are they taking a risk when they convert the currency into local currency?

[English]

Mr. Clark: If I understand your question, you're concerned about what the business model is for exchanges, particularly when bitcoin is extremely volatile.

They provide a matching service between people who have bitcoins and want local currency and people who have local currency and want bitcoins. They do tend, at certain times, to hold a lot of bitcoins, so there is a bit of risk due to the exchange rate fluctuations. But their general business model is that they will take a transaction fee for arranging the swap between the two currencies. It's sort of independent of what the exchange rate does. They can still make money as long as there's demand on both sides.

[Translation]

Senator Bellemare: Are there other companies like BitPay in the market, or does that company have a monopoly on this kind of transaction at the moment?

[English]

Mr. Clark: There are a lot of exchanges. BitPay is just one of many. Right now, I think we are seeing a consolidation. There are major exchanges at the top. I didn't run the numbers, but my intuition is that it's sort of an 80/20 type of thing, where 80 per cent of the exchange goes through 20 per cent of the exchanges. It's probably more extreme than that. I think the vast majority of exchanges probably go through three exchanges.

[Translation]

Senator Bellemare: What you are telling me is that, basically, BitPay operates like a stock exchange: it provides the users with a service and also establishes the exchange rate.

[English]

Mr. Clark: The exchange rate is not established by any exchange. It's just established by supply and demand on both sides.

In terms of BitPay, if I recall correctly — there are so many of these exchanges, and they all have similar names — they do operate as an exchange, but they're one of the companies that provides more of the bitcoin pipe so that companies can use them in order to exchange fiat currency into bitcoin, send it through the pipe and have it come out the other end. I forget exactly if that's BitPay's business model. In that case, they do operate an exchange; plus, they have additional services on top of that.

[Translation]

Senator Bellemare: My next question deals with the network and the people behind the system. As I understand it, during a Bitcoin transaction, the network is alerted and the miners behind the scenes solve the mathematical problem. We have learned that those miners are paid in bitcoin. Do you have an idea of the amount of bitcoin going into the pockets of these invisible people working behind the scenes?

[English]

Mr. Clark: First, I'll give you a little more detail of how the network works, and then I'll try to answer your question, which is: How many people behind the scenes have these bitcoins? The way it works is if I send you money, for example, I'll broadcast it to the network, and the network is going to add it to the ledger. The problem is that what you want is everyone on the network to verify that that update was correct, that I didn't spend more money than I have, that I actually have signing authority over the account.

What you want to avoid is a scenario where the ledger updates too quickly. If it updates really fast, then the other computers won't be able to keep up. If you want to start from the beginning of bitcoin time and go through the ledger from the beginning all the way through, you need to be able to do that in a reasonable amount of time as well. For that reason, the protocol puts in an artificial delay which slows things down, so it makes sure that the ledger updates on the order of about every 10 minutes.

You've referred to a computational problem. The way they do it is they give this computational problem that's hard to do, and it's not inherent to the currency at all; it's basically an artificial delay to slow things down, to make sure lots of verification happens. That's why it takes about 10 minutes. Because there are mining rewards and fees, the miner gets both the fees and the mining reward.

Senator Bellemare: There are fees, too?

Mr. Clark: Yes. They are very small, but there are fees. The miner is the one who gets that fee. What you get is a competitive environment where all the miners are trying to compete to be the one that sells the block, because they're the ones who will get the fees and the mining reward. Because it's competitive, it leads to these roughly incentive-compatible things that make sure all the verification works. The design of it is intricate.

The question is: How much of the currency is held by the miners themselves? We know that a large amount was held by the first miner, the first person who started mining it, which was likely the person who created the currency. He or she or they hold a lot of the currency in reserves. It's safe to say that the miners hold a significant amount, but we don't have numbers for that.

Senator Bellemare: Do we know how many miners there are?

Mr. Clark: We know in terms of computational power, how much power they have. You can see how long it takes them to solve the puzzle, and then you can determine how many computers you would need to solve it, and then you have a sense of how much computation they have.

Senator Bellemare: Are those people at home waiting for an alert? Is that how they work?

Mr. Clark: In terms of the alert, that happens automatically. There's no human in the loop; it's just a computer that's set up. The computer receives it digitally and processes it. Originally, it was people at home, but now that the mining reward is substantially high, people have taken more of a commercial approach to mining. People buy specialized hardware. They hold it in typical server rooms. You're not going to make any money mining from home on a computer anymore.

Senator Greene: Thank you very much. As you're aware from your work in the area, we live today in a rapidly changing digital environment in which new products happen all the time. In fact, the rate of change is speeding up. That's certainly my perception.

Could we not be in a position five or ten years from now where you could have 30 or 40 or maybe 50 digital currencies competing for space in the international environment?

Mr. Clark: Yes. That's certainly one outcome that people consider. Even now, we've seen the emergence of something that's generally called altcoins. They're alternatives to bitcoins. There are a lot of them out there. They are competing to a certain extent, but bitcoin is far and away the most prominent one.

Senator Greene: It is now, but there could come a time — and I suspect there will come a time — when somebody will create a currency that is perceived to be better, maybe more anonymous or less anonymous, or with lower transaction costs, et cetera, that would challenge bitcoin. Currencies might come and go rather quickly. How convertible are these digital currencies with each other?

Mr. Clark: To address your first point, even today with these altcoins I referred to, they are trying to improve on the design of bitcoin in some aspect. Generally, they shorten the delay from 10 minutes down to a shorter time. Some of them are looking at making it more anonymous. Some of them change this computational puzzle so it consumes less electricity. Those are some of the changes that people are interested in. Yes, I do think you will see competition. There will be different currencies. As a consumer or a company, depending on the properties you want, you'll choose the currency that gives you the properties that are as close as possible to the ones you want.

In terms of exchanging between digital currencies, exchanges also offer this service. Once again, it's just a demand-based thing. If I have bitcoin and I want to change them into peercoin, and someone else wants to change peercoin into bitcoin, then the exchanges that exist today will facilitate those transactions.

A lot of them, though, do go through bitcoin as a common currency. Bitcoin is exchangeable with everything else, but the other ones aren't necessarily exchangeable with each other yet. But that's something that could change.

Senator Greene: With regard to regulation, it seems to me that national regulation is a bit problematic. Do you think that international regulation is required at some level, at some point, in order to be effective?

Mr. Clark: I'm not an expert on regulatory issues, so I can't really comment. I know that in other spheres that involve things on the Internet, new technologies and things that people are concerned with, such as piracy and that type of thing, there are international organizations that try to step in and at least suggest what regulation should look like, and then it's up to countries to sign on. It wouldn't surprise me to see that, but I have no opinion about whether that's better or worse.

Senator Greene: Do you have any bitcoin?

Mr. Clark: I do, yes.

Senator Greene: How long have you had it?

Mr. Clark: I've had them for several years.

Senator Greene: And you've watched them go up and down?

Mr. Clark: That's right, yes.

Senator Greene: Have you purchased anything with bitcoin?

Mr. Clark: No, I haven't. I've held on to them. Because I do research in this area, they're useful for me to have for research purposes. Because I bought them — or I obtained them. They were actually a gift. I've acquired them through different means, but I mean the original set. They were worth a lot less. Psychologically, I don't maybe attribute the full value to them, even though they're worth a lot. If I had put out that much money to obtain them, I would treat them with more security than I actually do.

Senator Greene: Thank you.

[Translation]

Senator Rivard: Yesterday, we had a presentation from officials from the Bank of Canada. I will not go over everything that was said. But one part made an impression on me, a slide called "The Potential Role," which I would describe as synonymous with "Advantages." They talked to us about the reduced costs of financial intermediation, the irreversibility of payments, and something they called the "high degree of privacy"; not the "degree of privacy," but the "high degree."

When I hear things like that, I think about money laundering. You mentioned it a little earlier. It was your impression that money launderers will always stay faithful to the exchange rate and that Bitcoin are not of interest because you said that they could be traced back almost as easily as someone using an exchange. Is that what you said, actually?

It is your impression that money launderers are not interested in Bitcoin, but will just carry on. I would love to hear from officials at the Canada Revenue Agency to see if they are as optimistic as you have been. My impression is that they will focus on the exchanges and that they will not be interested in Bitcoin as such.

[English]

Mr. Clark: The question, I guess, is on money laundering and whether launderers are interested in bitcoin, and in terms of exchanges as well. As I mentioned, in order to obtain bitcoins, you do have to go through exchanges. Right now there are no regulations on exchanges, I believe, that apply. I believe most exchanges based in Canada voluntarily subscribe to the regulations that would be imposed, under their best estimate of what would happen. That does make it less attractive.

The fact that it is traceable presents new technical challenges because, as I mentioned, law enforcement have pretty decent mechanisms for tracing Internet packets, so you have to worry about the traceability on that front as well. Yes, it's completely possible that money launderers would not prefer to use bitcoin. I'm not exactly sure.

[Translation]

Senator Bellemare: I was under the impression that the countries using bitcoin the most are the United States, Canada, Australia, and perhaps England, the United Kingdom, because there has been no mention of countries that use the euro. Would the use of bitcoin be less attractive in the euro zone because people can already do business with a common currency and because there is perhaps a link with the fact that a large number of people using the euro makes it easier to use in transactions?

Do you see a link between the use of a single currency in European countries and the use of individual currency in other countries?

[English]

Mr. Clark: Your question is if there's any connection between the use of euros, which is already international currency, and bitcoin.

First off, I don't know for sure, I haven't seen numbers, but I've heard that Germany is one of the most accepting of bitcoin.

[Translation]

Senator Bellemare: So my premise is not correct because you are saying that Germany is a major user of bitcoin.

[English]

You're saying Germany, even though they're using the euro.

Mr. Clark: That's right.

Senator Bellemare: Perhaps my hypothesis wasn't correct.

Mr. Clark: That's true. It's an interesting question to think about, whether that type of currency that you can take across borders, whether bitcoin competes with that property of currency. I'm not sure we've seen evidence that it does. When I think about bitcoin, I'm primarily thinking about online transactions as the main potential. I'm not sure it competes necessarily.

The Deputy Chair: As I have no other names, I have a few questions.

Your second point was the secure cryptography, that there were some algorithms that were probably very difficult. If Mr. Snowden would like to enter into the business, do you think he would have much problem? He seems to be good at it. The NSA in the United States probably has good algorithms and he went into their computer and got the information. We know that year after year — it's not published — our banks are also victims of people going into their computers. Could you clarify that question of security?

Mr. Clark: Sure, that's a very good question. We don't obviously know what intelligence agencies know in terms of cryptographic breaks on cryptographic elements. Is there the potential that the NSA, or CSEC in Canada, has the ability to break things like bitcoin?

I watched the Snowden revelations closely, and the feeling I and most of the cryptographic community got from them is they're interested in attacking what's called the end point. If you think of cryptography as a tunnel, the message has to go in somewhere and come out somewhere. That's where they're attacking. They're not actually attacking the tunnel itself. None of the revelations suggested they have any potential to break new things that we didn't know about. I can't say, it's unknowable, but there's no indication in any way they have special abilities to break it.

The second point I would make is that a lot of the cryptography that underlies bitcoin also underlies standard transactions online. If you send your credit card online it goes over SSL which is the cryptographic tunnel that protects those credit card numbers. Depending exactly on what algorithms they have, my sense is any major break they have against bitcoin could apply to those algorithms as well. I don't think you go after bitcoin if you have that ability.

The Deputy Chair: Yes, but you have many others that are creating other electronic currency. I guess each one has a different algorithm?

Mr. Clark: I can get into the details. There are basically two algorithms. One gives you signing authority over the account, and that tends to be the same across all currencies. The other is what's called a hash function, which is used in maintaining the ledger, making sure the ledger is correct and kept orderly.

Specific points where the hash function is used do tend to differ from currency to currency. It's maybe not as security-critical as the signature scheme. If you can break the signature scheme you can basically steal everyone's money. That's the most substantial reliance on cryptographic algorithms, and that one, we're fairly confident, is secure.

The Deputy Chair: Going back to what Senator Tkachuk said before, it's a commodity. You were talking about those who were mining the system. I had the impression that it would be like when we buy shares, when a new mine is developed and there is no production. It's just a piece of paper and we buy the possibility that one day there will be gold or silver.

The bitcoin itself is a market. If I buy U.S. dollars and intend to make money just in dealing with money, I can do it. I can be in the business of making money with bitcoin and I can use it to buy other goods.

Where do you see the development? Is it on bitcoins themselves or as a tool to buy? As a tool to buy, we have to do all these transactions with money already to get the bitcoin, so why bother doing all of this? Would it be better to say this would be more of a business itself in dealing with bitcoin?

Mr. Clark: To your first question, there are definitely people who hold bitcoin for both purposes: one is to transact in bitcoin and the other is to hold it more like a commodity, like a speculative instrument. They compete, I would argue, because if I buy shares in companies, it's not because I want to spend those shares in order to actually transact with them.

I think the main people, the developers of the software, their intention is to try to encourage bitcoin to move more towards being a currency and not a speculative instrument or a commodity. A lot of the businesses are set up around trying to use it as a currency, and that's essentially their business model. People are willing to spend these bitcoins. They don't want to hold onto them. They're willing to actually spend them in order to complete transactions.

The Deputy Chair: I am tempted to say it would be mostly people less than 30 years of age who would do business like that rather than people over 50 years of age. I think people have to really be part of the computer culture rather than senior citizens trying to do this. I look at this and, even after a few weeks of meeting with experts like you, I would have a problem explaining that to somebody not familiar with this, even though I have received a lot of good information.

I'd like to thank you for providing your part. I'm sure my colleagues appreciate your knowledge.

I look forward to seeing what our researchers produce as a report, because they put all the pieces together. We will have to look at this and see where we go with that. Thank you very much.

Mr. Clark: Thank you.

Senator Irving Gerstein (Chair) in the chair.

The Chair: During this second hour of the meeting, we have the opportunity to receive a presentation from Mr. David Descôteaux, Associate Researcher at the Montreal Economic Institute.

In January of 2014, Mr. Descôteaux published an economic note entitled Bitcoin: More Than a Currency, a Potential for Innovation. This note offers an overview of the bitcoin phenomenon and issues that it raises.

Mr. Descôteaux, thank you for accepting this invitation to appear before us. You have the floor, and we will follow with questions after your presentation.

[Translation]

David Descôteaux, Associate Researcher, Montreal Economic Institute, as an individual: Hello and thank you very much for this opportunity. I am honoured to be here.

I am currently an associate researcher at the Montreal Economic Institute and I have reported on economic issues for radio and for magazines. In recent years, I have worked mainly in journalism and writing for the general public, so I will offer a kind of "Bitcoin 101." In other words, I will present it from the perspective of the average person since I am not an expert in computer science or monetary issues.

That said, in January, I published an economic note on Bitcoin, which is intended as an introduction to the subject for the general public. Without going into too many technical details, the document explained how the virtual currency works. It also touched on the benefits Bitcoin offers retailers and consumers, such as lower transaction fees. These benefits are derived from Bitcoin's main features — a decentralized network of cryptographic security — which do not require users to fill out forms with their personal information or pay transaction fees to third parties to process their payments, as is the case with Visa or PayPal, for example.

I also pointed out that Bitcoin has the potential to improve the way financial services are delivered. You may have heard this from other people as well. For example, Bitcoin could eventually be used for international money transfers like those handled by companies such as Western Union, given the relatively high transaction fees these companies charge.

However, the use of Bitcoin for this type of transaction depends on one element in particular: transaction fees must return remain low because that is Bitcoin's main advantage. And there are several reasons why there is no guarantee that fees will remain low. We can talk more about that when we move on to questions.

In my economic note, I also explained the challenges that Bitcoin must overcome in order to be more widely used. These challenges include a reputation for use in illegal activities, its high volatility, and security and fraud issues.

Bitcoin is two things: it is a digital currency and, in particular, it is a payment system. This is demonstrated by the many start-ups that are constantly inventing new products and services related to Bitcoin.

Several companies offer what is probably the best-known and most useful Bitcoin service: they allow merchants to convert Bitcoin to dollars or other currency almost instantly in return for a small fee. Just about a year ago, these merchants were still reluctant to accept Bitcoin as payment for fear that their value would plummet within a few hours or days of the transaction. Now that risk is borne by the company offering this service.

One subject that has caught my attention is the financial industry's interest, or lack of interest, in Bitcoin. A few months ago, Wells Fargo invited government officials and other participants to a meeting on Bitcoin. According to a report in the Financial Times, the purpose of the meeting was to explore what kind of Bitcoin services banks could offer — without going into detail about the services — and to try to grasp the possible regulatory implications.

You have to understand that the banks, and this is particularly true in Canada, are still waiting for more specific regulations on Bitcoin. Many are not offering banking services to Bitcoin companies out of fear of breaking existing laws, particularly on money laundering. However, without access to basic services like a simple commercial bank account, many of these companies may prefer to set up shop elsewhere, which could mean economic losses for Canada. Clearer rules could make it easier for banks and Bitcoin companies to do business with each other.

Generally speaking, I believe that for Bitcoin to continue growing, it needs an appropriate legal and regulatory framework in order to strengthen the confidence of consumers, merchants and investors, and encourage the system's wider use. Greater confidence could, in turn, lead to a greater demand for and greater interest in Bitcoin, which would mitigate the currency's volatility. With more participants buying and selling Bitcoin, the market would become more liquid and price volatility would decrease.

By eliminating investor uncertainty — and by investors, I mainly mean venture capitalists, for example, with money to invest in start-up companies — clearer rules would also encourage investment in Bitcoin initiatives and businesses. So the jurisdictions moving most quickly to clarify their regulations would likely be those benefiting the most from Bitcoin's potential for job creation and economic impact.

Before concluding, I would like to go back to something I said earlier. I said to that Bitcoin was two things: a currency and, in particular, a system. Things move very quickly in the Bitcoin world and there are several projects underway that would use the Bitcoin network to offer expanded financial services. One of these innovations is called "coloured coins". I am still trying to figure out what this is all about, and someone more qualified than I could perhaps give you more details. But, in general, by "colouring" a Bitcoin, users could trade shares, issue bonds or even transfer property in the same way that they can now send Bitcoin. So, while I am not a computer expert, I think we should approach Bitcoin as an idea whose potential goes beyond that of simply a digital currency.

To sum up, while I cannot predict the future or even say how Bitcoin might revolutionize the way we use money, it seems to me that, until now, the public and the media have focused on Bitcoin as a currency or investment, while its true potential probably lies elsewhere in a form that has yet to be discovered.

[English]

The Chair: Thank you very much for your opening remarks.

You include in your remarks a reference to the fact that banks are waiting for more specific regulations. It was with interest that I noted that at the shareholders' meeting of the Bank of Montreal several days ago, the President of the Bank of Montreal indicated they were going to be open to perhaps dealing in bitcoin if there were regulations brought forward.

Could you comment on the significance of the fact that there has been a reaction from one of the chartered banks?

[Translation]

Mr. Descôteaux: The CEO of the Bank of Montreal made that statement in the Financial Post yesterday. I am not a banker, I cannot speak for them, but I imagine that, at this stage, as we have seen in the United States, there are banks that might simply like to be able to finance some Bitcoin businesses, with venture capital perhaps, or just to offer basic bank accounts to those businesses.

As for using the Bitcoin network and providing services in Bitcoin, it is not yet possible to be precise about that. I think that the banks are still thinking about it themselves.

Senator Maltais: Thank you for your presentation, Mr. Descôteaux. There are certainly a lot of question marks about Bitcoin.

You talked about regulation in a legal framework. Could the legal framework that regulates Canadian banks apply to Bitcoin?

Mr. Descôteaux: I am not a legal expert, of course, but I feel that the current need, the first step, would be to clarify Bitcoin's place in current legislation. I am not sure that we need to invent new legislation. But for a bank, for example, the uncertainty is in not knowing exactly whether any given regulations on money laundering apply to Bitcoin. I think that clarifying Bitcoin's status would probably situate it within current regulations automatically.

The devil is in the detail, of course. There are all kinds of regulations for all kinds of Bitcoin businesses. So it is very complex. But, at this stage, I feel that a simple clarification of what a Bitcoin business is and what kind of box it has to fit into, would be a good place to start.

Senator Maltais: What tack would our committee take to make sure that it fits into the legal framework for banking?

Mr. Descôteaux: Once again, it is a question of clarifying Bitcoin's status. For example, in the United States a few days ago, the Internal Revenue Service issued a statement that Bitcoin is a commodity, not a currency, so it is taxable. If you make capital gains in Bitcoin, for example, you have to declare them. I think it applies to consumers as well as to merchants. Everyone wants to know where Bitcoin fits. Some merchants, for example, are still a little hesitant to do business with, to accept, Bitcoin because they do not know where to declare those earnings in their tax returns. Clearly, from the consumers' point of view, there is almost no protection. If people want Bitcoin to continue its popularity, it is critical to establish a legal framework for it.

Senator Maltais: Last year, the Standing Senate Committee on Banking Trade and Commerce conducted a study on money laundering. Despite Canada's very strict legal framework, despite the oversight bodies, the RCMP estimates that about $15 billion, perhaps more, are laundered in Canada.

Does Bitcoin's arrival open the door for unregulated money laundering?

Mr. Descôteaux: Possibly. Money laundering is clearly very, very big, though, and Bitcoin is still very, very small.

I was reading statistics saying that the black market in the United States is calculated to be about $2,000 billion. While it is true that Bitcoin can be used for illicit purposes, at the same time, it is still very small in the big picture.

The other interesting point is that regulations, depending on the way in which they are made, could help authorities to better control Bitcoin use, depending on the details, of course.

Senator Maltais: If you had a recommendation for the committee, what would it be?

Mr. Descôteaux: As I said at the beginning, we have at least to try to find out where Bitcoin stands in the current situation. Is it a currency? A commodity? What kind of legislation applies to Bitcoin, so that everyone, businesses and consumers, knows what the rules of the game are?

Senator Massicotte: Thank you for being here and for providing your clarifications, Mr. Descôteaux.

I am going to follow along the same lines as my colleague. You were looking for clarification, but I believe that Revenue Canada, as well as the IRS in the United States, has declared bitcoin to be a commodity, something people own. In tax terms, you are taxed for any profit or loss when you hold the commodity.

What else do we need? Why would the government recommend coming up with other regulations? Because, as has been said very clearly, the important thing is that the cost must remain very low for it to remain competitive and useful.

The more regulations you have, the more guarantees you require, the more it going to cost someone and the more the costs will go up. What kind of regulations could we need? Why would they be necessary?

Mr. Descôteaux: That is a very good question because, in fact, most people agree that Bitcoin needs a regulatory framework, but very few people can say exactly which legislation has to be amended or introduced. Not being a legal expert myself, I have difficulty in venturing an opinion along those lines.

You mentioned the costs of the regulations, of course. That is quite a delicate balance because, at the moment, one of the advantages of Bitcoin, as you said, is that the fees are very low.

Now, if we go about creating substantial regulations that would result in costs for Bitcoin companies, those costs would likely have to be passed on to the consumer in one way or another, and the competitive advantage would be lost. This is quite a delicate balance, but there have actually been communications with the Canada Revenue Agency. I do not think that the general public really knows what to do about Bitcoin in terms of taxes. If regulations have already been issued, perhaps it is just a question of informing the public what they are.

Senator Massicotte: Do we agree that Bitcoin will never become the official currency of the country?

Mr. Descôteaux: I would not go there. As I was saying in the introduction, I am much more optimistic about the technology behind it all and about the network that continues to develop daily and that may result in an innovation. But as a currency per se, I doubt it. I do not know if we need new currencies, but we always need innovations in order to reduce costs for consumers and business.

Senator Massicotte: I agree with you. I do not think that it could become our currency. The government will not allow it because Canadians would lose all the flexibility of a monetary policy. That said, you are a member of the Montreal Economic Institute, after all, which is a firm believer in free trade, the free market and the capitalist system.

Why the regulations? The government does not regulate other commodities like gold and silver. There are a bunch of other commodities, and the government has no role to play in making sure that people will not lose money. Why not let the market determine how things turn out? Yes, there is quite a high risk, as is the case for many commodities. Why would we want to act differently in this case?

Mr. Descôteaux: From a regulatory point of view, as I mentioned earlier, Canada comes in second after the United States among the countries that receive the most venture capital for bitcoin enterprises. I think it is 15 per cent in Canada. A lot of investors could be ready to invest more, but when you do not know if from one day to the next a country will decide that the bitcoin is illegal — as has happened in some countries — there is a risk and one hesitates to invest. As for economic advantages, some clear rules could facilitate things and would attract more investment here.

Senator Massicotte: If I understand your last comment correctly, you are asking the Government of Canada to say that in the years to come no legislation will be brought in that will hinder the bitcoin? I do not understand.

Mr. Descôteaux: And I am not sure I understand your question.

Senator Massicotte: To give assurances, comfort to those who want to invest in this commodity, you are asking the Government of Canada to create regulation which will not be binding? I do not understand your request.

Mr. Descôteaux: I am not asking for anything, but if the Bitcoin is to continue to grow, there have to be clear rules — for instance, how does the bitcoin fit into the financial system — from the government which would specify that it is a virtual currency that is tolerated and accepted — this would facilitate things. And afterwards, the market should be allowed to do what the market does.

Senator Rivard: Thank you, Mr. Descôteaux, for your presentation. Before asking you a question, I would like to go back to a few words at the end of the French version of your presentation. It says: "The devil is in the details."

In the penultimate paragraph of the French version of your presentation, you say: "As we speak, there are several projects that are ongoing."

"Ongoing," means that this is before a court and not in process. So, it is true that the devil is in the details.

We discussed the danger of money laundering, but several witnesses have drawn our attention to the fact that the Bitcoin is currently accepted by certain establishments as payment. You are from Montreal and probably own a few bitcoins. Can you tell us what type of businesses accept the bitcoin for products or services?

Mr. Descôteaux: In Canada there are about 100 businesses. There are not many in Montreal. I believe there are only two. They are mostly retail businesses. In Montreal I think they are clothing shops. In Europe and in the United States, a lot of cafés and bars accept the bitcoin.

For this type of business, the advantage is that they do a lot of small transactions where clients use credit cards, and I expect that at the end of the month this makes a difference in their costs. A lot of boutiques decided to join the Bitcoin adventure for marketing purposes. A few months ago if you had a small business and decided to accept the bitcoins, you would get publicity in papers all over the country. That is a good way of getting a little publicity. Retail merchants see concrete advantages in using them.

Senator Rivard: Do you think that in the near future a lot of businesses will accept the bitcoin in exchange for goods or services? For the moment, it is practically a speculative currency.

Mr. Descôteaux: As an investment, indeed, it is pure speculation. If there are tangible and concrete advantages for a business — those are two different things. I am not saying that an incredible number of businesses will start using it. I am waiting to see how all of this is going to develop. As long as the transaction fees remain low, which is the main advantage for a business, this could be popular if people open up to it a bit.

You have to understand also that one of the problems of the bitcoin, one of the barriers to its popularity, is the fact that it remains relatively complicated for the common person. If it is not understood quickly enough, people hesitate to invest in it. The future will tell if it will become more popular. At this time, over a one-year period, the number of businesses who see advantages to the bitcoin is growing.

Senator Bellemare: First, I want to congratulate you for your economic statement. I found it very clear and very interesting to read. We were saying earlier that the devil is in the details, and that may have drawn your attention. In your economic statement, there is a note, note No. 9. You refer to the BitPay enterprise which plays a role in the convertibility of the bitcoin into fiduciary currency, and it says that the BitPay website claims that it offers this service to 12,000 businesses and charity organizations. It is the charity organization that got my attention.

We know that the bitcoin is often used in international transactions. Did you look further into this matter of charity organizations using this? If it is written there, it is because they must deal with those organizations on a regular basis. This is not an anomaly or an exception.

Mr. Descôteaux: That is a very interesting observation. Unfortunately, I did not look into the charity organizations. In my reading, I read — and I have often heard that this was a fairly popular use — that a lot of gifts are made to charity organizations using bitcoins. I am not certain of the advantages there, but indeed that is something it would be interesting to look into further.

Senator Bellemare: I don't know if you can answer my second question. We often hear that these transactions are managed in a decentralized way using algorithms and that those algorithms become increasingly complex. Is the complexity of the algorithms proportional to the scope of the transaction?

In other words, when you purchase a coffee, you do not pay a large amount with the bitcoin, but will the algorithm be the same if you negotiate a Tesla, for instance? Or are there less onerous mechanisms with regard to the flexibility and complexity of the mathematical algorithm according to the size of the transaction?

Mr. Descôteaux: I am going to try to answer you as best as I can, even though I am not a computer geek. I think the algorithm you are talking about is the type of puzzle you must solve to obtain the bitcoins, when you confirm transactions. That algorithm is indeed designed so that it becomes harder and harder to resolve. Because of course there are very powerful computers that work on this, whereas a year or two, you could from your home, with your laptop, mine bitcoins. Today that is impossible.

Of course, the algorithm adjusts to the speed it takes to solve the last puzzle. If it does not take enough time, the next puzzle will be more complicated so that there is always a challenge, in order to respect the production rate for bitcoins, because I think they expect that bitcoins will be minted until 2025 or 2030. Of course, it has to be very, very complicated because it has to reflect the technological innovations that allow things to be resolved more quickly.

But in a transaction, I think the issue is to know whether the transaction costs will be higher according to whether it is a small or large transaction. To my knowledge, no. I would have to check, but I would even say that the costs are sometimes lower when it is a big transaction, perhaps because the reward in bitcoins is proportionally higher for a bigger transaction. But, that said, it remains minimal, it remains under 1 per cent in the vast majority of cases.

[English]

The Chair: Thank you very much. Mr. Descôteaux, that concludes our questions today. On behalf of the members of the Banking Committee, I would like to express our great appreciation for your appearance before us today and helping us with our deliberations. This meeting is concluded.

(The committee adjourned.)