Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 8 - Evidence - April 10, 2014
OTTAWA, Thursday, April 10, 2014
The Standing Senate Committee on Banking, Trade and Commerce met this day at
10:30 a.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
The Chair: Good morning. Today the committee is holding its sixth
meeting as part of its study on the use of digital currency.
The committee has heard so far from the Department of Finance, an economic
historian, a professor at the Rotman School of Management, the Bank of Canada,
an expert in the area of cryptography, the Bitcoin Strategy Group and from
CAVirtEx, Canada's largest bitcoin exchange.
During the first hour of this meeting, we will receive a presentation from
the Canadian Bankers Association and the Royal Bank of Canada. These
presentations will educate the committee about payments systems currently used
by financial institutions, including mobile and digital products, allowing
members to compare these systems and products to the digital currencies such as
Representing the Canadian Bankers Association is Mr. Darren Hannah, Acting
Vice-President, Policy and Operations. From the Royal Bank of Canada we have
Carolyn Burke, Vice-President, International Cards and Canadian Regulatory
Payments; and Jeremy Bornstein, Head, Emerging Payments. Welcome to the
committee and thank you for being here today. I will turn the floor first to the
Canadian Bankers Association, to be followed by the Royal Bank of Canada.
Mr. Hannah, the floor is yours.
Darren Hannah, Acting Vice-President, Policy and Operations, Canadian
Bankers Association: Thank you, Mr. Chair. I am pleased to be here today
representing the Canadian Bankers Association and our 59 members, which includes
domestic banks, foreign bank subsidiaries and foreign bank branches operating in
Canada. The CBA values the opportunity to contribute to public policy
discussions on important issues affecting Canadians and to assist the committee
on its study of digital currency in Canada.
The CBA was invited here today by the committee to share our knowledge of
recent developments in the area of digital currency and trends in electronic
payments. We have been listening with great interest to the hearings held to
date and the committee has heard extensively from various witnesses on the
basics of digital currency.
At the outset, I should note that banks in Canada have not formally endorsed
any forms of digital currency, though this is obviously an area that the CBA and
banks are monitoring closely to see how they are evolving, given the central
role of banks in the payment system. Ultimately, we want to ensure that
consumers and their funds are well protected and that any transaction is safe
and secure. This is very important to Canadians. In fact, our public opinion
research has found that 76 per cent of Canadians trust banks to protect their
personal information and transactions. We need to maintain confidence among
Canadians across the payment system.
It's through that lens that I will focus my remarks and offer a banking
industry perspective on innovation in digital payments and how the stability and
enormous benefits of the current payments system may provide some perspectives
for the committee to consider as it continues its study on the issue of digital
Banks are strongly supportive of creating new ways for consumers and
merchants to engage in e-commerce and participate in transactions that are
efficient, safe and secure. In fact, banks are often at the forefront of new
payment technologies. Since 2010, for example, banks have been involved in
rolling out NFC technology to facilitate contactless credit card and debit card
transactions at point of sale. This same technology can enable payments using
mobile wallets, letting consumers store credit card and banking information on
their smartphone device and pay for purchases with a tap of the device. With
recent data showing that more than half of Canadians own a smartphone, mobile
wallets and mobile payments present an opportunity for Canadians to have access
to additional payment choices that are efficient, safe and secure.
To facilitate the adoption of mobile payments in Canada for the benefit of
consumers and businesses, Canadian banks and credit unions have worked together
to develop the Canadian NFC Mobile Payments Reference Model, which is an
agreed-upon set of principles for mobile payables. Several mobile wallets have
been launched by banks using this model. The model is built around a focus
around security and the use of existing technologies, such as contactless
payment terminals. This will provide merchants with a seamless opportunity to
take advantage of these technologies by using systems that are already in place
for debit and credit card acceptance.
The payments ecosystem involves the coordination of many parties to function
effectively. It is our objective that providing early clarity on the design of
systems that enable mobile payments will help to build efficiencies into the
future deployment of those systems in Canada. Furthermore, customers are
benefiting from the mobile payments experience by doing it safely and security.
While innovation in the payment system should be encouraged, it will only
take place with sufficient safeguards to ensure the safety of consumers and the
stability of the current payment system.
When a consumer deposits money at a bank, the funds are held in a regulated
financial institution and the consumer benefits from the rights, privileges and
protections associated with dealing with a reputable, regulated institution.
This includes depositor protection, clear disclosure of consumer rights and
responsibilities, compensation for loss in the event of fraud and a trusted
dispute settlement mechanism. Banks also perform the role of a trusted third
party when payments are made using a bank account or bank-issued credit,
verifying the availability of funds and guaranteeing the safety and security of
In contrast, there are risks of using digital currencies that we must be
mindful of. First, consumers are subject to all of the risks that go along with
changing one currency for some other currency or mechanism such as exchange risk
and liquidity risk.
Second, there is a risk that the service provider they have selected to hold
their virtual currency will lack the resiliency to remain solvent or lack
sufficient security standards to protect the digital currency held in trust.
The losses experienced by consumers recently in high-profile bitcoin exchange
failures demonstrate the risk to consumers of dealing with payment services and
systems that do not offer these protections to these customers.
As this committee knows, rapid growth and innovation in digital payments has
resulted in a much more fractured payment system with new entrants and
competitors offering novel payment solutions that are attractive to consumers.
As I have just noted, the emergence of unregulated entities presents a variety
of risks to Canadian consumers and to the security of the payment system,
particularly in the context of consumer protection, consumer disclosure, data
protection and system stability.
The banking industry has undertaken some analysis of these issues with a view
to understanding their impacts and what is needed to address them, thereby
encouraging debate and discussion. As a result, we have come to the view that
there is a strong case to be made for implementing regulatory measures for the
shadow payments system that would achieve three main objectives: one, that
consumers are properly informed about the payment service being offered; two,
that the payment service providers are held to prudential and operational
standards and thresholds to minimize the likelihood of a service provider
causing harm to consumers or to others in the payment system; and, three, that
consumers have access to some form of recourse should there be a failure to
deliver on the payment service as agreed.
The banking industry is proud to be an integral part of the evolution of
Canada's strong payments system. Banks support an open, competitive and
innovative digital payments system that promotes consumer confidence and focuses
on the safety and soundness of the broader payment system.
I look forward to your questions.
The Chair: Thank you very much, Mr. Hannah.
Carolyn Burke, Vice-President, International Cards and Canadian Regulatory
Payments, Royal Bank of Canada:
Good morning. My name is Carolyn Burke, and I am very pleased to appear before
the committee today.
Thank you for inviting RBC to speak and present today. We are committed to
providing both consumers and merchants with easy and secure payment options. We
have a proud history of innovation in payments and strongly support Canada's
leadership position as an electronic economy.
Canadians are well served by current payment options and we have not seen a
demand for digital currency to date, although we have seen an abundance of news
headlines. RBC continually monitors both emerging client needs and technology
Today we are pleased to speak with you about our emerging commerce strategy
and activities. Thank you for having us. We plan to address how out digital
solution meets consumer and merchant needs for choice, security and low-cost
The goals of RBC's digital payment solution are to make commerce easier,
safer and more rewarding for consumers and merchants.
RBC has always stood for providing clients with choice — choice in how they
bank and choice in how they pay. We deliberately waited to bring mobile commerce
to market until we were able to offer both Interac debit and credit as payment
options. Our commitment to merchants is that mobile commerce will not increase
transactional costs. We will the deliver payment at the lowest cost based on how
the client chooses to pay — by Interac debit, credit or store gift card.
We are actively working with a cross-section of merchants and consumers to
understand their needs and deliver an easy, safe and rewarding mobile commerce
experience, which, by design, is not very different from how your plastic card
works today. We are giving consumers the same choice in how they pay today with
plastic — Interac debit, credit or store gift card. Live receipts in online and
mobile banking, available with the mobile solution, can be much easier to access
and store than the paper receipts we all receive today. My colleague, Jeremy
Bornstein, will speak to you now about the technology itself and how the
security built into it is present as mobile payment security is our clients'
primary concern and our top priority.
Jeremy Bornstein, Head, Emerging Payments, Royal Bank of Canada: Thank
you Carolyn and good morning. My name is Jeremy Bornstein. I am responsible for
driving RBC's emerging payments strategy and solutions.
RBC has always strived to deliver choice, convenience and security to our
clients. The model for mobility payments that was being implemented globally was
not good enough for us. We developed a patent-pending process and technology
called RBC Secure Cloud to ensure that clients could choose between debit,
credit or gift card. Instead of putting that sensitive information on the phone,
we store that client data behind our firewall, where we can protect it, on our
servers in Stratford and Guelph, Ontario.
Forbes magazine recently published an article on the top influencers
of mobile commerce. RBC, among only a small handful of banks, was recognized as
shaping the industry, along with Apple, Google and PayPal. RBC Secure Cloud is
the first mobile payments service of its kind, and we are very proud of it. We
began our mobile commerce journey over four years ago with industry solutions,
but, then, as RBC has consistently done to maintain our market-leading fraud
prevention and client experience, we created a proprietary solution to provide a
higher level of choice, convenience and security.
Slide 3 of the presentation that was handed out earlier is a simplified
representation of our solution. On the left- hand side of that page are the
client payment credentials. We leave these credentials, as mentioned, securely
behind our firewall. Importantly, doing this also allows our clients to put all
of their RBC payment cards — not just one, but all, including their Interac
debit, their primary credit card and, increasingly, a second merchant co-brand
credit card — on the phone, ensuring that the client has choice in how to pay.
We are committed to not steering clients to one payment instrument over another.
In the middle of the slide, RBC Secure Cloud calls that payment data down
from our data centre and prepares it for payment. Our solution today relies on
the phone's near field communication, NFC, antenna as that ``last inch'' between
the consumer and the merchant.
Merchants that today accept contactless debit or credit card payments are
ready to accept RBC mobile payments. They do not need to change anything. While
there are many emerging alternatives to NFC, with 19 and actually now 20 of the
top 25 merchants accepting contactless payments in Canada, we believe that NFC
provides the greatest opportunity for ubiquitous, universal acceptance.
We are very confident in the security engineered into RBC's payment cards and
the fraud prevention systems that are behind them. RBC Secure Cloud takes
payment security to a new level. Once the payment has been provided to the
merchant, there is no difference whether a client swiped, dipped or tapped their
payment card or used their mobile phone to pay. The merchant gets paid at the
lowest cost possible, based on the payment instrument the client chose.
Thank you for having us here this morning. We hope we explained how our
solution addresses consumers' and merchants' needs for choice, security and
The Chair: Thank you, panel, for your presentations.
Senator Maltais: I just found out that I can use my debit card to make
a payment without having to insert it in a machine.
Ms. Burke: I am very glad it is a Royal Bank card. Thank you.
Senator Maltais: Hold on. On the subject of digital currency, what I
am trying to figure out is how it benefits the average consumer. I am not
referring to those in the business world who have to transfer funds from one
country's currency to that of another; I have nothing against that. But, here,
we are concerned with regular people, workers who earn less than $60,000 a year.
Those people need some protection.
Yesterday, we heard from bitcoin experts, and they gave us a demonstration,
walking us through how a consumer could purchase $500 worth of bitcoin to pay
bills with. They could purchase that amount in the morning, but if the value of
the currency dropped during the day, by the time the evening rolled around, they
might have only $300 left in their account. They would be short the $200 they
need to pay the rest of their bills. Conversely, if I have $500 in my bank
account and $487 in bills to pay, I know I will be able to pay all my bills and
still have a few bucks left at the end of the day. So that is the first
safeguard that is lacking.
What is the benefit for the average consumer, everyone else aside? I remember
when bank machines were first introduced. It took me a while to accept them; I
did not trust them very much. Now I know. The technology has worked well across
the country; in every bank and financial institution, it has been a success. The
average consumer is worried about just one thing: when they have a bit of money,
they want to know the best way to keep it. They do not want to take any chances.
During the 2008 financial crisis, GIC values dropped faster than we could blink.
No one wants a repeat of that. They want to know that whatever savings they have
So tell me this. Can this new digital currency give Canadian consumers that
protection? And I am not referring to any one type of currency, but digital
currency in any form.
Mr. Hannah: Senator, I think your question is fantastic. I think
you've really hit the nail on the head.
When you put money in a bank account, you have the security associated with
that. You know that it's a well-run, well-regulated, safe and secure
institution, especially in Canada. We have the strongest banking system in the
world. We have had for several years, and we continue to have. You know that the
bank will be offering you a mechanism to transact electronically, such as the
one Ms. Burke just described, that is safe and gives you all of that convenience
along with the security associated with it. You know that what you have
deposited is Canadians dollars. What you are spending is Canadians dollars and
what's left is Canadian dollars.
If you're going out and using a digital currency instead, frankly, you have
to understand that what happens at that point in time is exactly to your point.
You are literally selling your Canadian currency, getting something else,
subjecting yourself to the exchange rate risk and doing all of this outside of
the regulated financial systems and, therefore, outside of the umbrella and
blanket of security associated with that.
To your point, does a consumer get additional value from using that
mechanism? Not from our perspective. Frankly, from my perspective, banks provide
fantastic mechanisms to be able to help you transact electronically with those
accounts and to do so with the security and safety associated with that.
Senator Massicotte: Thank you to all three of you for being with us.
We're navigating. We're learning a lot and we have a lot to learn. Thank you for
your help in getting us there.
Ms. Burke, yesterday we heard testimony from one person whose business was
trading in bitcoins and his account was closed. There was a natural suspicion or
prejudice against people dealing in bitcoins even though it shouldn't affect
your account. Obviously your account is in Canadian dollars.
Is that the case? What is the orientation of banks towards those people who
may be transacting in bitcoins?
Ms. Burke: Currently bitcoin is unregulated and the government has
also said there are concerns around the source of funds and knowing the client.
It is not something that a bank can put through the normal processes that we
For example, today, if you come in with cash or another currency to deposit,
of course we go through anti-money laundering, anti-terrorism and we know the
source of funds. That's just not possible with bitcoin.
Senator Massicotte: I appreciate that. In this case he's not asking to
convert bitcoins. He's in a business. He's a miner of bitcoins, so nothing to do
with bitcoins. He will occasionally ask for withdrawals to purchase bitcoins or
the reverse, but he's not asking you to take bitcoins. He's saying that caused
you to cancel his account.
Mr. Bornstein: RBC has no issue with institutions or businesses that
are accepting bitcoins for payment. Our challenge today is businesses that
specifically are profiting from the exchange of bitcoins, either in or out of
the currency exactly for the reason that Carolyn mentioned: We do not understand
the source of those funds and we cannot put them through the proper regulatory
screens of AML and AT financing.
Senator Massicotte: If you look at FINTRAC regulations, they are
telling us that anybody opening an account with them, they identify the person,
more than you do, with a driver's permit and so on. Did you ask them those
questions to make sure they did their homework regarding FINTRAC, and if that's
the case, why would you take a position on that? You might consider it a
commodity. I'm sure you have a lot of clients dealing with commodities and you
don't close them down automatically. He's saying you do.
Mr. Bornstein: I'm not sure of the specifics around this particular
case so it's difficult to address, but by and large our issue goes back to being
able to understand the source of funds.
Senator Massicotte: It gives a sense of this is a competitor of yours,
you protect your own turf and therefore you will prejudice yourself and make
sure you get an advantage over any competitor. It looks that way, but I don't
know the details.
Let me go on.
Ms. Burke: If I could address that, I think that's inaccurate. There
are other commodities where we can actually understand where the funds have
gone, we can understand if the funds are coming back and there is some
traceability, and it comes down to knowing our clients. That's a regulatory
obligation that we take on willingly.
In the case of bitcoins, these are anonymous transactions and there is no
traceability. We can attest to the fact that we do know our clients. I really
object to the fact that you think it's a competitive issue; it is not.
Senator Massicotte: On the traceability, we've heard very contrary
testimony. In fact, the Bank of Canada representative said no, as you know, for
every bitcoin transaction there is actually a chain and they can find out all
the time. It's like the Internet. When it started everyone said it was going to
be anonymous, but it's not. We've had many experts who said it's traceable.
There is a historical record of who was the owner of that bitcoin, and if you go
back to the exchange you can find out who that person was. I guess you don't buy
Mr. Bornstein: The actual situation is that yes, indeed, the
transactions are traceable. One of the benefits of bitcoin is that the
transactions are irrevocable and logged in this ``blockchain.'' There is no name
attached to that transaction, not in the exchange and not in the blockchain
itself. That transaction is actually anonymous.
Senator Massicotte: If you want to go to the miner or the exchange,
just like the Internet, you can go back to the server such as Rogers and find
out who issued the Internet.
Mr. Bornstein: There is no Rogers behind bitcoin.
Senator Massicotte: There is an exchange. For example, the person we
met yesterday has a record of who the client is and if you wanted to, I'm sure
the police could find out who that person was.
Mr. Hannah: Senator, you're touching on an interesting and a very
important point. I think what you're getting at is that users, consumers and
firms that deal in bitcoin or any other payment form would benefit from a
robust, regulatory framework so that everybody understood the rights,
responsibilities, safety, soundness and security associated with the payment
mechanism. That's something, from a CBA perspective, we strongly support. We
think that payments should be regulated in that way so that irrespective of
which payment service provider you use, you will have certainty about its
strength, about its stability, about the framework, about the rights and
responsibilities that you have and that those are fully disclosed to you and
that you have recourse if something goes wrong. I think that would allay a lot
of the concerns you are raising. That is exactly the question. This is very much
an unregulated space and that creates a challenge.
Senator Massicotte: It is the issue facing our committee: Is there
need for regulation and what kind? You seem to be suggesting that the regulation
should be almost like a bank, in other words, be a member of the payments
system, have assurance, I presume, and you're asking for a lot of comfort from
those doing the trading.
It is an option and it is something we need to look at, but you realize there
is another option. Revenue Canada is taking a position, like the IRS, saying
this is a commodity, it's like dealing in gold or silver, and we don't have the
safeguards for the commodity traders.
One could argue we're not trying to replace our national currency. There is
no need to do so. I don't know why we would do so. I don't know why the bank and
Canadians would accept to lose that monetary control and comfort, but why not
let a different form of payment flourish without the impediments and the burdens
of all this regulation? There must be something leaner and more efficient that
wouldn't increase costs. Is there not, in your opinion?
Mr. Hannah: I understand where you're coming from, senator. The
challenge is that the average consumer on the street typically won't walk in
with a barrel of oil or a pound of gold and expect that they can pay for
something. It's not marketed as something that is to be used by individuals for
small transactions on a person-to-person basis.
When you get into digital currencies, in fact there is a lot of that. I
believe you saw a bitcoin-related ATM. There is not the bifurcation or
distinction. There are a number of people out there who I am certain view this
as a payment mechanism in exactly the same way they pay with a credit card or a
debit card or any other standard retail payment mechanism, and they may not
fully distinguish the difference. That's our concern.
Senator Massicotte: When you say ``regulation,'' there will obviously
be the public purse involved. Why would Canadian taxpayers get involved in a
situation where they guarantee and assume that risk? Let the buyer beware. If a
person wants to trade in bitcoins he's very much aware today. We've heard 80
percent of owners of bitcoins are speculators. They know the risks. Why would
Canadians wish to protect those parties from any loss? Let it go and if it
succeeds it succeeds and maybe in five years we will regulate it. Why not let it
flourish and buyer beware?
Mr. Hannah: We're not asking for anything over the top from our
perspective. From our perspective we are asking for a basic level of level of
regulation so you can have comfort that what you're using is safe and secure and
that you can get recourse if you need it. From our perspective, for the sound,
well-run non-bank service providers out there already, these are standards they
would probably already meet because they're good business practice. For those
who aren't, this gives them a road map to get to where they need to be in order
to have consumer confidence.
I hear where you're coming from, senator, but from our perspective this
provides a good foundation and a step up, and for a lot of those firms it's
already something they would meet.
Senator Bellemare: My questions are more or less along the same lines
as what we have been discussing.
We know Canada's banking system is very effective, very efficient; it has
implemented innovations and proven itself. But costs are incurred when
transactions are made within the system.
As you know, yesterday we heard from people in the bitcoin industry.
According to them, whether bitcoin is a currency, commodity or payment method is
still unclear. That is another question. But given the low cost of bitcoin
transactions, the currency is a tremendous innovation as far as payment options
and e-commerce are concerned, internationally speaking, in particular; and that
is something the traditional banking system cannot offer. We were given
countless examples of that.
People know, when they buy bitcoins, that the party on the other end of the
transaction will receive them. Even though they do need to be converted, a big
fee will not be deducted. On the issue of bitcoin volatility, we were told that
an entire system was in the works to prevent the currency's value from
fluctuating the same day. We will no doubt see long-term trends emerge.
I would like to hear your take on that. The cost of bitcoin transactions is
so low that it can release significant value into the economy, something that is
not possible with the banking system right now. Perhaps it would be possible if
the banking system were to include that kind of currency in its service
What do you think of that idea? What we are seeing here is great but it
imposes costs on the merchant and the consumer.
Ms. Burke: It would be helpful to examine exactly what the costs are.
Perhaps Mr. Hannah can lead us off, followed by Mr. Bornstein, to explain the
facts about bitcoin-related costs.
Mr. Hannah: I'm glad you raised the question, senator, because it's
important. It's something of a myth or a misunderstanding.
Let's walk through what a transaction would look like. If I were to try to
send you $100 using bitcoin, and bear in mind that bitcoin is relatively
illiquid, my transaction would start with Canadian dollars, and presumably you
want Canadian dollars. Let's walk through what that would actually cost. I'm not
making these numbers up; I'm using the numbers off one of the major bitcoin
exchanges in Canada. The exchange is going to charge you $5 to load your $100
dollars up to your account with them. They will then charge you 1.5 per cent to
take your Canadian dollars and exchange them for bitcoin. I'll send it over to
Jeremy — and I'll have him talk in a moment about the implications — and the
exchange will charge Jeremy 1.5 per cent to change it from bitcoin to Canadian
dollars, and then will charge him another $6 to take it out of the bitcoin
exchange and send it back to himself. Add that up and the $100 transaction cost
There is another element to that and I will let Jeremy speak to it.
Mr. Bornstein: The exchange of bitcoin between parties, assuming one
is not paying a business but is a standard person-to-person transfer that banks
such as RBC offer as a free service to clients, incurs costs and friction.
Presumably we each have commercial wallets we have not programmed or created our
own wallets, which could conceptually happen. In that case, these wallets are
for-profit institutions, and that transaction has a minimum cost of 1 per cent
to transfer the funds from Darren to me.
The additional challenge that many consumers will face in the use of bitcoin
is not only the volatility but also the fact that these are illiquid and are
traded on numerous exchanges.
The price of bitcoin today, and I'm not quoting exact numbers, may be US$400
per bitcoin. Depending on which exchange you go to, that may be anywhere from
$250 to $800. It's incumbent on the client to search out the numerous exchanges
around the world to determine where to make that exchange. One ATM in particular
that I visited and used charges a 3.5 per cent load fee, and on top of that
averages six exchanges. So you're getting a far more expensive bitcoin than if
you were to do this on the web or by using the Canadian dollar.
Senator Bellemare: We talked about the numbers, so it might be helpful
if you could provide the committee with a comparison of how user fees and
transaction costs associated with bitcoins stack up against those of more
traditional payment systems.
Credit cards are expensive to use. And depending on the financial
institution, paying with a debit card can also be riddled with fees for many
users. Merchants incur costs as well. The costs are many. It would be helpful to
have something concrete we could look at to see the differences in the
transaction costs on both sides.
Senator Massicotte: And for foreign currencies.
Senator Bellemare: Yes.
The Chair: Mr. Bornstein, could you provide this to the committee?
Mr. Bornstein: I think it's something we could take away, between the
CBA and RBC.
The Chair: Thank you. Kindly provide that to the clerk.
Ms. Burke: We just described an example where one person was sending
another $100 in bitcoins. There would be no cost associated with a similar
transaction in a Canadian bank. Consumers are protected in that regard and can
transfer funds from one person to another without incurring a fee.
Senator Massicotte: We would like to know how it works for foreign
Senator Bellemare: Foreign currency transactions.
Senator Massicotte: When the costs are taken into account, the fees
associated with the transaction may be too high.
Ms. Burke: Since we are talking about a Canadian dollar to Canadian
dollar transfer, the transaction does not involve a foreign currency.
Senator Bellemare: Let us look at the example of a merchant buying
goods from another country. The merchant has to pay in another currency. Costs
are tied to any international transaction. And the same goes for an individual
wanting to purchase a product online.
Ms. Burke: That is definitely something we can provide. But I would
like to point something out. If I am a merchant buying $1,000 worth of goods
from the U.S., then, the funds are transferred from Canadian to American
dollars. And if I make that purchase using bitcoins, the money is transferred
from Canadian dollars to bitcoins and from bitcoins to American dollars. That
means I have to pay the fees associated with two foreign currency transactions,
so the costs of two conversions, not just one.
Senator Ringuette: I have been a member of the Banking Committee for
eight years. This is the first time that the Canadian Bankers Association has
appeared before us asking for regulations.
Mr. Hannah: Thank you, senator.
Senator Ringuette: You indicated that banking institutions in Canada
provide a guarantee for e-transactions. I have noticed over the last year quite
a number of difficulties experienced by some clients and merchants in terms of
fraud and other losses. Some of your members are refusing to meet their
obligations in regard to the loss incurred through e- transactions. I take your
statement with some reservation because of the different public issues that have
In addition to you requesting regulation, the group before the committee
yesterday also asked for regulations. As Senator Massicotte indicated, they're
providing a service mostly because the banking entities in Canada and elsewhere
in the world have been asking for transaction costs and exchange rates that are
too high in the current world market. For six years you've been arguing against
capping off merchants' fees. If what you're providing is not good for the
market, the free market will come out with another service. Now there's another
service, and you're asking for regulation. You seem to want to have both ends. I
have some difficulty with that.
Coming back to the issue of bitcoin, are you, as a banking community in
Canada, looking at competitive alternatives to bitcoin, based on the cost?
Mr. Hannah: There were about four or five different things in there. I
will try to start from the top.
Let me be clear on one statement first, because you talked about liability. I
think what you were getting towards was zero liability. The zero liability
policy of institutions and networks is abundantly clear, and we all abide by it.
In fact, our compliance with it is overseen. If you are an unwitting victim of
fraud, you will not be liable for the transaction. That is entirely clear. I
appreciate there are occasional cases that you will see in the press where
people claim that they have not been properly dealt with. From our perspective,
the zero liability policy is entirely clear and it's fully implemented and we
think it's important. Let me be clear on that.
Second, you talked about pricing. As we just discussed, when you walk through
what it actually costs to make a bitcoin transaction from beginning to end,
starting in Canadian dollars and ending in Canadian dollars, what you end up
seeing is what great value you get as a merchant from accepting credit cards as
a payment mechanism because not only do you get better pricing than the pricing
I just articulated in bitcoin, but along with that you get the assurance that
you've got of a strong, stable, well-run network. You get reduced cash handling
expenses. You get the ability to sell on credit. You get everything associated
with that. It proves is that you get a fantastic value.
Senator Ringuette: And the fees.
Mr. Hannah: With respect to the question about regulation, as I
mentioned earlier, all we are looking for is some basic level of safety,
soundness and security to make sure that if you enter the market, you're doing
so in a way that helps customers have certainty that the service being provided
is one that is safe, sound, secure and well run, and that you are fully informed
as a consumer or a merchant about what your rights and responsibilities are and
that you have some kind of recourse if something goes wrong. That's really all
we're looking for.
As for why it is that some institutions were coming and asking for the same
thing, I dare say in a lot of cases it's because, as I mentioned earlier, they
already meet those standards and would welcome that certainty and would welcome
the road map for those who don't actually get to that point.
Senator Ringuette: One of my questions was in regard to whether you
are in the process of looking at a competitive alternative, because down the
road you have not been willing to reduce your transaction costs, whether it's
with credit cards or even exchange rate into foreign currencies or expediting
funds to another country. My question was, are you in the process right now of
looking at a competitive alternative to bitcoin because they are becoming and
will become a major competitor for your profit centres?
Mr. Hannah: I would say that we already have a very competitive
alternative, and that's the existing payment card and payment network that we
have in Canada for electronic payments and electronic transactions. That is an
innovative platform. New innovations are coming out, some of which were already
described, and I mentioned earlier it's remarkably cost-effective compared to
Senator Ringuette: As Senator Bellemare asked you, you have not
provided what the costs are. I'm supposing —
The Chair: They're providing that to us.
Senator Ringuette: I still have no answer as to whether they're
looking at competitive alternatives. That's okay.
The Chair: We will put you down for a second round.
Senator Black: Thank you all for being here, and Mr. Hannah thank you
for being back with us.
I started my career as a banking lawyer, so I'm very alert and appreciative
of the fact that caution is a very important aspect of the business that you do,
because it not only serves your business but it serves Canadians. I acknowledge
and appreciate that.
Also, by way of introduction, I would like to commend RBC for the tremendous
and deep community work that you do across Canada. I want to use this
opportunity to recognize the contribution that you have made and continue to
make on an ongoing basis.
I have three questions, if I may. Perhaps Mr. Hannah would be best to address
the first question.
Last Tuesday, the Chief Executive Officer of the Bank of Montreal, when asked
to comment in respect to virtual currencies, indicated that his view was that if
virtual currencies were reliable and regulated, then there is no reason why we
should not be an intermediary in bitcoin-related transactions. He continued to
say that if bitcoin can be a reliable medium of exchange, then at some point in
the future we may be able to conduct business with bitcoin.
My question to you is this: How would you define a reliable medium of
Mr. Hannah: That's a good question. I don't want to put words in the
executive's mouth. I can't speak for what he had in mind. I would say, as I've
said earlier, and what I think he was pointing at, the need for some sort of
regulatory framework so that we can have some certainty about the safety,
soundness and security of any payment mechanism, including bitcoin, so that I as
an institution or as an individual know that what I'm using has a certain degree
of safety and security behind it, I know what my rights and responsibilities
are, and I and my clients can have confidence that if there is any problem, they
can get the problem resolved.
Senator Black: You would identify, I presume from your comments around
innovation, that his comment is a justifiable comment. If it's reliable and
regulated, why not?
Mr. Hannah: Then you get into a business question, and each individual
firm will obviously make its own decisions about what business lines they want
to get into. It certainly does make the product more viable at that point in
time. Whether a firm chooses to use it or not ultimately is a firm decision.
Senator Black: Building on that is my second question, which could be
responded to by all three. Yesterday, the panel we heard from, who were
advocating regulation, suggested to us that one way to simply regulate these
transactions would be to define bitcoin under the foreign exchange regulation
and compliance requirements in Canada. My question is, does that make sense to
you? Does that work?
Mr. Hannah: I appreciate the intent, but the challenge is then that I
still need certainty that the mechanisms by which it is being exchanged or
transacted are safe, secure and sound, that if I'm moving it to a wallet or I'm
moving it to an exchange to hold it, that they do so safely and they meet the
sort of security expectations that you would want to have, that they disclose to
me fully what my rights and responsibilities are, what I'm going to be paying,
what I can expect and what kind of recourse I have if something goes wrong. It
is not just the mechanism. It's not just the digital currency per se but it's
the mechanism around it to actually give effect to that.
Senator Black: They were suggesting that the regulations that govern
the foreign exchange transactions in Canada now pick up all of those concerns.
Would you agree with that?
Mr. Hannah: That I can't answer honestly.
Senator Black: Could you answer that, Mr. Bornstein or Ms. Burke?
Mr. Bornstein: One of our issues with digital currency and bitcoin in
particular is that it's designed to elude our ability to understand its source
of funds, so therefore we cannot satisfy our AML and AT financing requirements.
Senator Black: That is interesting. I'm just learning now, but other
witnesses have told us that in fact the bitcoin protocols are more transparent
than other existing protocols. We've heard evidence on this. Do you disagree?
Mr. Bornstein: We disagree.
Senator Black: Fair enough.
My last question, if I may: Let's set all of this aside. Help me understand
what role digital currencies, in your view, will have five years from now.
Mr. Bornstein: To Senator Ringuette's point, we spend a lot of time,
especially in my group, as well as involving other teams around the bank,
looking at these innovations and different solutions and trying to envision what
need they are satisfying for our clients, both merchant and consumer. We have
not yet identified or understood the unmet need that these digital currencies
are solving. It's difficult to imagine five years from now how they will play
into the banking fabric.
Senator Black: Do you believe they will have a role?
Ms. Burke: As we said earlier, consumers and merchants are looking for
choice, convenience and confidence in the system they use. Canadians have been
well served by the payments system. We see payments systems around the world,
and when you look at the overall cost of payments, with our low cost Interac
debit along with credit and other means of payment, and when we look at our
technology advances in Canada, both in chip and in near field communications, we
are the leader in electronic payments and choice.
I believe we're seeing a lot of headlines, but we're not seeing a lot of
traction on digital currency because the need simply isn't there in Canada.
Senator Black: Would you expect that trend to continue? Would you
suggest to me this might be a fad?
Ms. Burke: RBC is dedicated to ensuring that we meet our customers'
needs over time. As customers' needs evolve, we will constantly be there. Jeremy
and his group are working with them to make sure we are there and are meeting
their needs. So I really don't see the need for a separate digital currency in
Canada's economy today.
Senator Unger: I'm very new this to, although I've been reading and
hearing about bitcoin. Your presentations and all of the exchanges are very
I've heard the word volatility used a lot with regard to bitcoin. I've also
heard that banks are safe, sound and secure. Can the relative price of a bitcoin
be manipulated by entities that hold large numbers of bitcoins and/or by
computers that can create fraudulent transactions?
Mr. Bornstein: Unfortunately, I don't believe we are qualified to
respond to that. There have been certain press releases or discussions around
that, but I'm not certain.
Mr. Hannah: To your point about volatility, there is no doubt that
bitcoin is incredibly volatile in its price from day to day; therefore, you as a
consumer, if you choose to use it as a payment mechanism, expose yourself to
that volatility in a way that you don't if you use a more conventional payment
mechanism offered by a financial institution.
Senator Unger: I would like to assure you that as a bank customer all
my life, I have no intention of venturing into this.
The Chair: That was not a question, I assume.
Mr. Hannah: But we appreciate the vote of confidence.
Mr. Bornstein: Yes.
Senator Greene: It occurs to me that the value of bitcoin — that the
purpose, the strength and the need for it — is that it allows peer-to-peer
transactions without going through the banking system or any national payment
system where there are a lot of costs. That is a very valuable thing.
At this point in time, the value of that, it seems to me, is theoretical in a
sense, because there are not a lot of peer-to- peer transactions. It requires a
degree of trust, or something like that, which is not present yet, but it's
If in a few years' time — five or ten or whatever — the number of
peer-to-peer transactions improves and becomes larger, do you see then that
digital coins, such as bitcoin, would have a positive contribution?
Mr. Bornstein: At RBC in particular, we're very proud to offer our
clients up to 10 free monthly person-to-person, P2P, transactions at no cost
within Canada. Additionally, we have many other free ways to move money between
people. They cause very little friction and are very easy to use. They're on
mobile devices. We recently released a service that allows our clients to
exchange money between peers using Facebook at no cost — up to 10 transactions a
month, as well.
As Carolyn has mentioned, we believe we have a number of wonderful solutions
in the market that are serving Canadians well at very low cost today, and we
expect that trend to continue.
Senator Greene: In your peer-to-peer transactions — let me see where
I'm going with this. Suppose the Bank of Canada decides to move into digital
currency and allows the Canadian dollar to be held digitally. That could lead to
people being paid in digital Canadian dollars as opposed to putting Canadian
dollars into their bank accounts. The money would be held online in their online
wallets, as it were, as opposed to their Canadian bank accounts. The advantage
of that, it seems to me, is that it would reduce costs throughout the system. It
would be much more efficient. Do you see that as a possibility in the future?
Ms. Burke: We're working with the Canadian government today to allow
consumers without bank accounts to have payments made on prepaid cards. In
essence, that is digital currency; it's an electronic payment to a card they can
then use to shop or buy things with safety — not carrying around cash.
Today, if you look at Canadians' paycheques, 9 out of 10 are deposited
automatically to their bank accounts. You could ask yourself: Is that digital
Senator Greene: No, I would say that is not, because the funds are not
held digitally, really. They are held in your bank account online that you can
have access to, but peer-to-peer transactions — there might be a few that are
allowed. I am not sure how you do that. It's not what the bitcoin is supposed to
Mr. Hannah: The challenge with your question is that what you are
envisioning is a paradigm that will be fundamentally different from that in
which we currently live. It brings into question a whole bunch of issues that
are difficult to grapple with. For instance, one that would obviously come up is
how then do you freely exchange between the physical and the virtual? What's the
implication of that? Do they trade at the same price?
It creates a whole bunch of interesting questions. Trying to figure out how
they would all offset would be quite a thought experiment.
Senator Greene: I agree with you. But I think that's where we're
headed. We had a number of presentations already that implied or said that
digital currency is where the Internet was about 15 years ago and that we're
just at the till of the iceberg. You either jump on the iceberg or you get run
over by the iceberg. That's the implication.
Ms. Burke: It comes down to what consumers and merchants want to do
with their money. They're looking for the benefits; they're not looking for the
technology. They want to be able to transact with security and confidence, and
have choice in how they do that. If they want to do it electronically with a
phone, they should be able to do that. If they want to be able to make a
person-to-person payment electronically or digitally, they should be able to do
that, but they should be able to do that with confidence and security.
Certainly they're looking for the benefits. I don't think they're looking
necessarily for the underlying technology.
Senator Greene: I'm not sure what that means, really.
Senator Poirier: I'm not part of the regular committee, so a lot of
this is new to me today. For the sake of argument, when we talk about bitcoins,
let's say that the question that the transaction fees would be similar working
with bitcoins or working with transactions in the banks or debits. What would be
the advantage or disadvantage? Why would we want to use a bitcoin compared to
what we're using now if the transaction fees are similar or exactly the same?
From what I understand, our chair said he bought some bitcoins yesterday
morning, but by last night he had already lost money. That reminds me that it
sounds like a stock market thing. If it is like a stock market thing where you
are not secure with your money, does that mean there's a chance that he could
have made money, too? Is that the advantage of going to a bitcoin, because you
could increase the value of what you bought instead of just losing it? I'm
trying to understand the advantage of getting a bitcoin. Is it taking away the
Mr. Hannah: I'll answer that. The short answer is, there is none. From
our perspective, working through an existing financial institution with the
electronic products that they make available to you will offer you a better
client experience, better security, better confidence, clear disclosure and
certainty associated with that.
Senator Poirier: Do you know if there is the possibility of losing the
value of your bitcoin during the day? Is there also the possibility of
increasing the value? Is that the game people like to play, similar to the stock
Mr. Hannah: Certainly, that is a possibility. It is a highly volatile
currency and, indeed, there are people who trade it for that specific purpose.
Our concern, though, is that it's one thing to engage in trading knowing that
that's what is going to happen, trying to arbitrage that; it's another thing
with me simply buying bitcoin today with the intent of using it as a mechanism
to pay somebody tomorrow and all of a sudden having the value of your holdings
drop by 20 per cent overnight.
Ms. Burke: There is, for a certain contingent, the value of anonymity.
The financial tracking that banks do would not apply to bitcoin, but we would
not promote that as an advantage.
The Chair: I want to clarify that my motivation was neither to make
money nor to be anonymous, but rather for demonstration purposes only.
Senator Massicotte: I agree with you that the costs of the use of
bitcoin are not very publicized.
Let's talk about your costs, RBC. Could you give us what the total cost is to
the user, to the merchant, to everybody concerned in the transaction to use a
debit card? Let's say a $100 transaction, how much would it cost with a debit
card, how much with a credit card, to all parties? You mentioned three options.
Ms. Burke: There are also store cards or prepaid cards.
Senator Massicotte: Tell me what the total costs are of those three
for a $100 purchase.
Ms. Burke: Let's talk about a consumer perspective for a second. The
majority of consumers have bank accounts with packages, and debit would be free.
Certainly our Interac Flash debit is free, so it's basically all you can eat,
and many of our younger consumers in particular use it extensively.
Senator Massicotte: Credit card?
Ms. Burke: Could I finish with the merchant side?
Senator Massicotte: My chairman is going to give me crap if I don't
move quickly enough here.
The Chair: Is it possible that you could respond in writing to us on
Ms. Burke: Certainly, we would be happy to.
Senator Massicotte: I bet you the answer is going to be that the
Interac, I presume, is a lot cheaper to the total parties to the transaction
than a credit card.
Ms. Burke: It is. It also has different qualities inherent to it.
Senator Massicotte: You made a statement earlier that you don't
discriminate as a policy, yet I see a lot of advertisements for credit cards. I
get a lot of letters about credit cards, yet I rarely get advertisements for
Interac, nor do I get letters recommending Interac.
Ms. Burke: I'm very disappointed you haven't noticed our massive
Interac advertising campaign out there right now.
The Chair: We will get the response to the questions in terms of the
Senator Bellemare: My question may be more food for thought than
anything, but if you have an answer, that would be great.
Let us say that the bitcoin payment system is able to fix the fraud problem
tied to the digital currency and prevent fraud within the system. Given the
finite number of bitcoins — estimated at $21 million — and with international
trade really on the rise, do you not think bitcoin's value will increase over
the long term?
If its value were to increase over time, the use of bitcoin could make it
possible for the digital currency to become a store of value and a really
credible payment method.
That would require some examination.
Ms. Burke: Or speculation.
Senator Bellemare: Or speculation, yes.
Mr. Hannah: Honestly, senator, the reason I can sleep at night is
because I don't engage in foreign exchange transactions. It's speculative; it
could happen potentially. But our concern isn't related to people using it as a
commodity to buy back and forth and arbitrage on. Our concern is with people who
are using it as a payment mechanism and the risk they are facing.
Senator Ringuette: I am of the same view as Senator Greene. You have
costed yourself out of the market.
Senator Greene: I don't think I said that.
Senator Ringuette: To reach your point, I see that this is the future
and it is based on cost. With this process, the fact that people will not need a
bank account with all the fees attached to it in order to make transactions, buy
stuff and receive payments; I think you should be very concerned.
That's a comment. I don't need a response.
The Chair: Is there a question for the record?
A quick response to the non-question?
Ms. Burke: Canadian merchants benefit from one of the best payment
systems on earth.
Senator Ringuette: They pay for it, too.
Ms. Burke: The blended costs between debit and credit cards are among
the lowest on earth. Some of these alternative payment systems actually cost
much, much more. As you do the research, you would find that they're free to use
them. They are actually more costly with more inherent risk.
The Chair: Thank you very much. You can tell by the nature of our
questions you have been very provocative and helpful. On behalf of all members
of the Banking Committee, I express our great appreciation for your appearance
During the second part of this meeting, we have the Canadian Payments
Association. The mandate of the Canadian Payments Association is to establish,
operate and maintain systems for the clearing and settlement of payments. The
association will provide the committee information on the payments systems
currently used by different institutions, which will allow the committee to
compare payments systems as they apply to different types of currencies.
Representing the Canadian Payments Association is Ms. Carol Ann Northcott,
Vice-President and Chief Risk Officer; and Mr. Doug Kreviazuk, Vice-President,
Policy and Public Affairs.
We welcome you both. I understand, Mr. Kreviazuk, you have an opening
Doug Kreviazuk, Vice-President, Policy and Public Affairs, Canadian
Payments Association: I do. Thank you very much, Mr. Chair.
The Canadian Payments Association is very pleased to be here to present
before your committee on this important study of digital currency. Thank you for
the opportunity, and it's my pleasure to be here. We have prepared a short deck
that will follow my remarks, so please refer to that.
Your study on digital currency is both timely and important, and indeed
hardly a day goes by anymore where you don't see firms like Bitcoin in the
But it's not just about crypto-currencies that are making the headlines. The
Canadian payments ecosystem is highly dynamic, with changes and innovations
taking place on many fronts. Innovative products and services that provide
increased convenience and efficiency for consumers also increase the complexity
and heighten risk in the payments ecosystem. As such, payments in general are
getting a lot of attention both in Canada and globally, and regulators are more
closely examining payments systems to ensure the appropriate level of oversight
and regulation. There is a critical need to ensure that there is a balance
between safety and soundness and innovation and efficiency. We believe that
research and monitoring the developments is essential for policy development and
In short, today I'd like to examine the key elements of the Canadian payments
system, touch upon the broad payments ecosystem, and share some of our research
and insights into the various payment trends, focusing in on emerging payment
With respect to key elements of the payments system, Canadians need payments
they can count on. In this regard, the Canadian Payments Association plays an
important role in the day-to-day financial lives of Canadians. Under our mandate
as set out in the Canadian Payments Act, we provide the policies, rules and
infrastructure that support and manage the daily exchange and reconciliation of
customer payments between Canadian financial institutions.
At the end of every business day, financial institutions also need a way to
settle up those obligations resulting from their clients' financial
transactions. The CPA provides the risk-proof settlement infrastructure over
which financial institutions can confidently make these payments.
The Canadian Payments Act also assigns a specific public policy mandate to
our organization. We're called upon to take into account the needs of users in
the design and operation of our rules, our policies, our standards and our
Risks can exist at any point in the ecosystem, from the exchange of a
fraudulent cheque to a cyberattack on an electronic payments system. For this
reason, we maintain an ongoing monitoring and analysis of systemic, operational
and other risks in the payments system and respond appropriately.
The CPA's public policy reach covers the majority of value moving through the
Canadian payments system. If, for a moment, we exclude the transactions of cash,
the value of payments made by Canadians, government and business in 2012
amounted to approximately $16.7 trillion. That was about 12 billion payment
items. Eighty per cent of all of this value, or $13.4 trillion, were cleared
through the systems of the CPA. This includes, among other things, cheques,
debit card transactions at the point of sale, pre-authorized debits, direct
deposits and wire transfers. The remaining 20 per cent, or approximately $3.3
trillion, are outside of the CPA and are composed of ``on-us'' financial
transactions at financial institutions, credit cards, closed-loop schemes that
include prepaid cards, electronic wallets and crypto- currencies like bitcoin.
While there are many payment systems, not all require the services of our
clearing and settlement system at CPA.
This illustration really depicts the broadest possible view of the Canadian
payments ecosystem. When you think about it, there are really four categories of
payment systems. The first, shown here in light blue, is the CPA's national
clearing and settlement system located at the core of the payments ecosystem.
Our retail payment system, the Automated Clearance Settlement System, or the
ACSS as we call it, tracks the exchange of retail payments between CPA member
institutions and calculates the overall balances owed to and from each of these
institutions every single day.
The Large Value Transfer System, or LVTS, is an electronic wire transfer
system that's also used to settle out the balances in our retail system. Each of
these two systems is supported by a comprehensive framework of rules and
standards and an act of Parliament.
The second category is the private networks or schemes here shown in grey,
such as Interac or Telpay. They operate their own payment services but rely on
the CPA's retail framework for clearing and settlement. For example, an Interac
payment made at the point of sale happens pursuant to our rules, and then those
items through our retail clearing system, the ACSS.
The third level of payment systems is shown in the dark blue and includes
systems like Visas and MasterCard. They do not rely on the CPA's retail clearing
and settlement system; rather, they only rely on our large-value system in order
to settle out the payment obligations between the various participants.
In addition to the credit cards, this category also includes Canadian
financial market infrastructures like securities and foreign exchange. To borrow
a term from one of the witnesses earlier this week with the Department of
Finance, they called this fourth category outside the ``regulatory perimeter.''
This area is also outside of the reach of the CPA's rule set and includes mainly
the closed-loop schemes or the private networks.
This final group, as I say, has very little to do with the CPA. The
closed-loop could range from stored value cards, to e-wallets, to
person-to-person payments such as bitcoin. Our only relationship to this group
would be the payments being made from the bank account to buy into these
products or to cash out and move the monies back.
So think about it for a moment. If I were to go to Future Shop and buy an
iTunes card, the purchase of the iTunes card of $50 would go through the CPA.
But what happens within iTunes, as I download the music and pay iTunes, is
completely outside our jurisdiction and happens totally within the iTunes
There seems to be some confusion as to what bitcoin actually is. Is it a
currency? We, at the CPA, share the same opinion that was shared with you
earlier this week by the Department of Finance and the Bank of Canada. Bitcoin
does not meet the test of what constitutes a currency. In our view, it's
deficient as a medium of exchange, a unit of account and a store of value.
If bitcoin is not a currency, is it a payment system? Like any payment
system, bitcoin does have rules, processes and participants. Structurally,
bitcoin emulates payment systems. However, when we at the CPA talk about payment
systems, we go beyond that. We talk about the overarching principles that should
also be kept in mind.
First, there's safety and soundness. The national clearing and settlement
system is there to facilitate transactions in Canadian dollars which are
backstopped by the Bank of Canada. It would not be appropriate to enter a
commodity into this environment. At present, settlement of payments made through
our retail systems settle next day. Despite the fact that they settle next day,
receivers of those funds generally are granted provisional credit by the
financial institutions. Why? It's because the system is built on mutual trust,
confidence and a robust legal and regulatory framework.
The counterparties in the payments system have absolute confidence that, at
the end of the day, settlement will occur. If the underlying funds are subject
to extreme volatility, participants may not be able to settle, or this may cause
them to rethink the provisional credit that exists and the efficiencies that
exist within the current system.
Let's look at innovation. I started my comments by saying that innovation
does take place in all aspects of the payment system today and not just in that
regulatory perimeter. I think the witnesses a moment ago spoke about that as
Thanks to a number of new rules in place by the Canadian Payments
Association, Canadians are now able to use their smartphones to take a photo of
their cheque and make deposits. We also work very closely with our member
institutions and scheme operators to facilitate the introduction of new
debit-based ``tap and go'' products, like Interac Flash.
The Chair: Mr. Kreviazuk, I'm sorry to interrupt, but we have about
another five minutes for your presentation or we won't have time for questions.
If I could ask you to keep that in mind, please.
Mr. Kreviazuk: I will indeed.
Bitcoin is often viewed as a disruptive technology, but they were there to
develop some of the innovative features of decentralized digital currencies, the
authentication without using a third party. Those products, while disruptive,
will ultimately move into more mainstream payments systems as we grow.
Let me talk for a moment about trends in payments to give you a sense about
crypto-currencies in the broader context. There are many trends in the payments
system. To help the committee appreciate the total payments landscape, this
table here actually breaks down the facts and figures of volume and value.
I think everybody knows cash. Although it's the number one used product
today, at 45 per cent, it only represents about 2 per cent of the value. It's
continuing to decline. Cheques are on the decline. But products like debit and
credit continue to grow, largely fuelled by the Internet or the online payment
In the emerging payments, the growth of e-wallets is also showing tremendous
growth, at about 40 per cent per annum. These numbers are very deceiving because
the actual volumes are so small.
Canadian data on crypto-currencies, such as bitcoin, is very difficult, so
what we have had to do is extrapolate from global data. We estimate there are
approximately 1,000 to 2,000 bitcoin transactions happening on an average day.
This represents about 1/100 of a per cent of the total volume of transactions in
the country today.
As previously noted, crypto-currencies do not rely on the clearing and
settlement system and therefore do not benefit from the legal framework set out
by the CPA or supporting legislation.
That said, these entities are not eligible for CPA membership. Current
members of the CPA must be regulated financial institutions. They must have
appropriate oversight and they must have access to emergency liquidity through
the Bank of Canada, all of which are there to safeguard our national clearing
and settlement system.
In conclusion, it's important to learn about these digital currencies, gain
some insights, but also understand the related risks of these products. Indeed,
the committee study, combined with the ongoing study by the Department of
Finance into the broader payment system, is an ideal opportunity to ensure that
the public policy objectives underlying the Canadian payment system are
respected. In this regard, we fully support the government's intention, as
announced in the budget last February, to develop a risk-based approach to
oversight of the Canadian payments system.
As we discussed today, not every emerging payment, and certainly none of the
crypto-currencies, are covered by today's regulatory environment. As we move
forward and we think about these products, we must think about the risks
associated with the products; can they be mitigated? Do these organizations or
digital currencies have a need, yet undefined, to access the clearing and
settlement system? Do the private, closed-loop payment systems such as bitcoin —
what reach do the regulators have to address the broader public policy issues of
user protection or system safety and stability?
With that, I will conclude, Mr. Chair, and answer any questions you have.
Senator Black: Thanks very much, sir, for that presentation. That was
If I understand your organization correctly, you are a service organization
that is funded and serves your existing members.
Mr. Kreviazuk: We provide two levels of responsibility. One is the
development of the rules and standards for the clearing and settlement of
payments, so it's a policy role. We have a secondary role of providing the
infrastructure that clears and settles all of these payments each and every day.
Senator Black: I understand that. I'm trying to simplify all of that.
You are not a government organization.
Mr. Kreviazuk: No, we are created by statute. We tend to call
ourselves quasi-public, quasi-private. Our board of directors today is composed
of mostly member financial institutions, with appointees from the Minister of
Finance. All of our funding comes through our membership. There is no public
funding. All of our governance structure is currently under review.
Senator Black: Very helpful. That does underline that you are a
service organization, and I say that in the most positive sense of the word. You
are a service organization, funded by your members.
Mr. Kreviazuk: We are.
Senator Black: If I am a bitcoin provider or another digital currency
provider, I cannot join your organization today.
Mr. Kreviazuk: Membership in the CPA is established by statute, which
is the Minister of Finance's purview.
Senator Black: That's interesting. That's helpful.
Mr. Kreviazuk: It actually says in there that you have to be a
regulated financial institution: Bank of Canada, all banks, trust and loan, et
Senator Black: Let's presume that digital currencies, at some level,
are here to stay and we can continue to look for developments in that regard.
Can you see a day when your organization would be expanded or amended to
accommodate digital currencies?
Mr. Kreviazuk: The payments system continues to evolve on many fronts.
I know the Department of Finance is looking today at this entire area of growth
in, we'll call it, the unregulated sector, whether we are talking PayPal, Google
or whatever. Their needs do change. But until this point in time, those types of
companies have never articulated a need to have access to the clearing and
settlement system within Canada.
Senator Black: Let me ask you this, then. Building on that, can you
see a scenario where commerce, individuals, would simply determine they don't
need your organization? Not personal.
Mr. Kreviazuk: No, not at all. I find it very difficult to believe
that a national clearing and settlement system that transacts, in total, over
$50 trillion annually would not be necessary.
Senator Black: But, sir, at some point people who ran the post office
would have advocated that the post office will always be necessary.
Mr. Kreviazuk: The CPA and the systems we run — and Carol Ann can also
speak to this — we are a tool to also effect monetary policy. We are closely
aligned with both the policies set out by the Bank of Canada and of the
government of the day, through the Minister of Finance.
Carol Ann Northcott, Vice-President and Chief Risk Officer, Canadian
Payments Association: I like to think I'm a fairly creative person. But what
you're talking about, is it impossible? Perhaps not, but it would radically
change the framework we live in right now.
What I would point to in particular is that when we talk about bitcoin, it is
largely targeting what we have talked about here, namely, a need around retail
payments. It is around those small-value, person-to-person, perhaps cross-
border payments. There are a lot of issues it attacks, which is really in that
retail space, the left-hand side. That's useful and interesting, and we can talk
But when you talk about the CPA, you have to then talk about the large-value
and the wholesale system. That is one that, yes, I could see evolving and
changing. But the framework we have now, monetary policy is implemented through
the LVTS. This is where wholesale fund transfers between banks go. All of our
financial services in Canada, whether it is settlement of securities, whether
it's settlement of derivatives or repo transactions, or whether it's foreign
exchange transactions to fund banks, ultimately must settle through a
large-value transfer system that meets international standards. That's the piece
that I think would be a little more creative.
Senator Black: And may never change.
Ms. Northcott: And may never change.
Senator Black: I can see that, but I can see change on the commercial
Ms. Northcott: I think that's the place where there could be
Senator Massicotte: Thank you both for being with us. This is very
I will pursue the same line of questioning. Obviously, you exist only where
there is an inter-bank or inter-financial institution transfer of money. As you
noted in your presentation, if CIBC or Royal Bank does something and you use
their services, and it's their credit or debit card, you don't get involved. The
transfers are made automatically in the bank. I don't see why you would get
involved in bitcoin because they don't need you; there is no relationship there.
Having said that, when you talk about your definition of currency, the lack
of stability or lack of certainty that there is, you note that maybe the
Canadian public would benefit from a bit more regulation there.
You're an expert on regulation re currency and money transfers. Maybe it
would not be within a payment system, but would you see the value of putting in
some form of regulation, FINTRAC or other forms of regulation, on this digital
currency to provide that certainty or comfort level?
Mr. Kreviazuk: I think many jurisdictions have been looking at these
types of products, all with the lens of any money laundering as a starting
point. Given the anonymity associated with the particular product, concerns do
arise. Both in the United States and in Canada, those concerns have been
To answer your question, AML is a concern, as the panelists here earlier
today said. It's about also having a framework for the users; that is, a
framework of understanding what it is that they are getting themselves involved
with. Are there forms of recourse? Yes, it may be buyer beware, but are they
being clearly disclosed?
Senator Massicotte: Basically making sure the public is aware of what
they are getting into, relative to the fact that it's anonymous and there is a
lot of correspondence. The U.S. Attorney General made a comment yesterday and
said the same thing, namely that this could lead to the use of digital currency
for the sake of whitewashing or money laundering.
We're getting testimony, including somebody from the Bank of Canada, saying
no. There is a perception that it is anonymous, but it's not. There is actually
a very visible chain. If you go back to the party-to-party transaction, you can
find out the identity of the person behind that transfer.
What's the truth? Some people are saying no; some people are saying yes.
You're the expert. What is it? Is it really anonymous? If you want to get to
know who owns a transaction, can you find out?
Mr. Kreviazuk: We're not the experts on bitcoin themselves. As you
pointed out at the onset, we don't know why they would have anything to do with
us, and they don't. They do not clear and settle their items because it's all
``intra,'' like PayPal is all within the PayPal family. The workings and the
operations within bitcoin are really not our forte, so I could not answer that.
Senator Massicotte: You're probably asking yourselves, what are you
Ms. Northcott: I will come at it a slightly different way because I
agree that we are not the experts. Perhaps I can give you a question to pose to
the other witnesses who come before you to try to get at this difference.
When it comes to the payments, you already talked about it as a currency, a
commodity and a payment. It does these three different functions. When you talk
about regulations, you'll want to think about what the market failures are in
each of those different areas and what the impact of those are that you would
want to regulate for because I believe strongly you regulate in proportion to
the risk. Often conversations mix all three of those uses. As you go through
this process, you should think about which market failure in each one and how
you might want to regulate it.
However, when you come down to this know-your-client piece in regard to AML,
I don't know the answer but I am curious about it. I think there are two
different areas. As a gatekeeper, the bank has a requirement to know their
client. In this current world, they have a mechanism to do so. They know the
questions to ask and how to get that information. You have to be careful about
the model because they're all different. Bitcoin is a specific kind of model and
each model would be different, so you have to ask that question. The question
is: What is the mechanism by which you can know your counterparty now — not your
client but your counterparty. It's a slightly different mechanism to do so. How
complicated is it to know your counterparty in that model? That might be where
you're finding that difference between the two. It's not completely anonymous —
it's a public ledger — but how does a bank actually know their counterparty?
That might be the question to pose to get to the difference between the two when
you hear conflicting information, because I don't have your answer and I have
read your testimony. That might be the question that solves this.
Senator Bellemare: My question goes back to your presentation and what
you said about the Canadian retail payments landscape. The figures were quite
interesting and rather surprising.
Could you please tell us the difference between payment value and payment
volume? I would like to be a bit clearer on that. It says that cash represents
45 per cent of payment volume but only 2 per cent of the value of retail
payments. Could you define for us what that means?
Mr. Kreviazuk: For most of us, we use cash to transact our small
purchases. We go to Starbucks — they are not so small; go to Tim Hortons, it's a
little smaller. We use cash quite frequently. The number of items or the number
of purchases that actually take place in Canada over the year using cash is very
high. We're showing that of all the purchases that happen within Canada, 45 per
cent of them are still made in cash. That's based on a diary study by the Bank
of Canada. However, because they're so small, they only represent 2 per cent of
the total ``spend'' in retail payments.
Senator Bellemare: Total spent as reported in the national accounts,
the expenditure on consumption?
Mr. Kreviazuk: There was a Canadian survey on all payments. We have an
approximation of how much all Canadian businesses, consumers and government have
spent in 2012.
Senator Bellemare: And the volume is the number?
Mr. Kreviazuk: Yes.
Senator Bellemare: Okay. So it's not in dollars, it's the number of
transactions. That's much clearer.
Thank you. That was my question.
Senator Ringuette: Can we go to your slide 4? At the right of your
slide, your list of credit cards, securities, and so forth, they do not go
through your system.
Mr. Kreviazuk: No, they do. There's a slight difference. Think about
Visa and MasterCard today.
Senator Ringuette: I think about them all the time.
Mr. Kreviazuk: When you use your Visa and MasterCard product at a
merchant, the processing happens all within Visa or MasterCard. They do all of
the calculations throughout the day of which institution knows which
institution. At the end of the day, they calculate who is in a net-owing
position and who is in a net-owed position.
In a sense, they are doing all of the origination, the exchange and the
clearing piece. Then they come to the CPA and they make large-value payments to
settle out the obligations between the major ``owers'' and the major ``owed.''
All they're using is our wholesale system to settle out those net obligations.
Senator Ringuette: But they are not regulated by you.
Mr. Kreviazuk: No, they're not.
Senator Ringuette: Exactly. Credit cards are not regulated through the
If you go, then, to the left side, credit cards in Canada are issued by
Canadian banks that are regulated by you. So the Canadian banks regulated by you
have a product that is not regulated by you.
Then we go to e-wallets, the electronic P2P. V.me by Visa is also a product
that is issued by financial institutions in Canada, and it is not at all within
your regulatory framework.
Mr. Kreviazuk: First of all, we don't regulate. The government
regulates and we have members that utilize our systems. The difference between
what I would call the grey and the dark blue is the grey depend on all our
detailed rules around how to create a pre-authorized debit, how to make a direct
deposit — those rely on all our rules and clear and settle through our retail
The ones on the right only use us as effectively the settlement agent to
settle out the obligations within their schemes.
The ones on the far left do not need us at all. That's because everything is
a book entry. Everything happens within their own little ecosystem.
Senator Ringuette: So it's the same comparison with bitcoin.
Everything happens within their ledger system.
Mr. Kreviazuk: Absolutely. The bitcoin is up under the virtual
Senator Ringuette: I'm trying to analyze the fact that the bitcoin
industry is asking for regulation. The bankers association is in front of us
this morning asking for them to be regulated through foreign currency. Where
would that put them in your system? You do have foreign exchange in your
Mr. Kreviazuk: There are different types of regulation. There is
regulation, as a prudential regulator, to ensure the health and safety of the
entity. There is regulation on the services. We don't regulate. The question
about what comes in with CPA is this: Is there an exchange of value that's
required that needs clearing and settlement? In bitcoin's case, there is none.
Senator Ringuette: They satisfy. Bitcoin is saying to us that
regulating through the same process as regulations we have in place for foreign
currency would be adequate. With regard to credit cards and the V.me by Visa, it
would be on the same standard. You would not be involved in the process at all.
Mr. Kreviazuk: No, we would not.
Senator Bellemare: How many people work for you, actually?
Mr. Kreviazuk: The organization has approximately 90 staff members
here in Ottawa, of which approximately 50 per cent help to support the actual
physical systems for the clearing and settlement of payments in the country.
Senator Bellemare: I thought it was bigger. Interesting. You're quite
Mr. Kreviazuk: We have a lot of strategic alliances.
Senator Bellemare: Thank you.
The Chair: Thank you, Senator Bellemare.
That concludes our questions. On behalf of the members of the Standing Senate
Committee on Banking, Trade and Commerce, I would like to express our
appreciation to our witnesses, and, again, we thank you for your appearance
I remind the members of the committee that we have a brief in camera meeting