Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 13 - Evidence - June 12, 2014
OTTAWA, Thursday, June 12, 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 is the committee's eighth meeting
in our special study on digital currency, including the potential risk,
threats and advantages of these electronic forms of exchange.
Still in the early, or learning, stages of our study, the committee has
received presentations from the Department of Finance, the Canada Revenue
Agency and the Bank of Canada.
We have heard testimony from academics in the fields of economic and
monetary history and in cryptography. The committee has also heard from the
Bitcoin Strategy Group; the bitcoin exchange, CAVirtEX; and Bit Access, the
makers of the bitcoin ATM who gave a live demonstration and purchase of some
bitcoin using the ATM here at committee.
As I said last week in my opening remarks, in the interest of full
disclosure, I would like to remind the committee that on Wednesday, April 9,
2014, I purchased, in front of the committee and in front of the public,
using the bitcoin ATM, 0.18 bitcoin for $100 Canadian. Today, based on
information from CAVirtEX obtained this morning at 10 a.m., that 0.18
bitcoin is now worth $125.14 — an unrealized, if I could sell it, gain of
This morning we are going to hear from companies involved in payment
systems. In our first session, we will hear from representatives from two
companies that deal with fiat currency, namely Interac and PayPal; in our
second session, we are going to focus on payment systems for digital
currency, specifically BitPay.
For our first hour, I'm pleased to welcome, from Interac, Caroline
Hubberstey, Head, External Affairs, Enterprise Strategy. Interac operates a
national payment network that allows Canadians access to the money held in
their bank accounts through 60,000 ATMs and 776,000 point-of-sale terminals
across Canada. From PayPal Canada, I'm pleased to introduce Barry Murphy,
Director, Government Relations, Canada and Latin America. PayPal is an
international e-commerce business allowing payments and money transfers to
be made through the Internet. I turn the floor over first to Ms. Hubberstey,
to be followed by Mr. Murphy.
Caroline Hubberstey, Head, External Affairs, Enterprise Strategy,
Interac Association: Good morning to you and to members of the
committee. I want to thank you for this opportunity today to appear. While
we don't have direct experience in the area of virtual currencies, we
understand that the committee is interested in our role in the payments
marketplace and our product innovations, particularly in the area of digital
payments such as our mobile and online solutions. I'm very pleased to be
able to provide you with that information today, and I hope you find it
Interac is Canada's leading payment brand and only domestic payment
brand. Our organization operates a low-cost and world-class debit system
that is embraced by Canadians. Our brand is chosen an average of 12 million
times daily to pay and exchange money with our various products. We securely
connect people to their money at the ABM, at retailers across Canada and the
U.S. and online through our Web-based services — Interac Online for
e-commerce purchases and Interac e-Transfer for person-to-person online
secure money transfers, which has a growing business use as an electronic
cheque replacement solution, particularly for small businesses. In addition,
Interac Flash is the secure, contactless enhancement of Interac Debit. It is
in widespread use at retailers across Canada and provides the platform for
mobile NFC proximity payments. We are also a leader in the area of fraud
prevention and protection.
On this note, and of particular interest to this committee for your
study, mitigating fraud is critical to maintaining confidence in electronic
payments. I'm pleased to report that Interac debit card fraud losses reached
the lowest recorded level in 2013. Fraud losses to financial institutions
decreased to $29.5 million in 2013 from a high of $142 million in 2009. Only
25 per cent of those losses, or $7.3 million, were the result of fraud
exploitation within Canada. This will continue to decline, and is, as we
move for full point-of-sale implementation by the end of 2015.
As a reminder, Interac transactions operate on a good funds model, so
there are no chargebacks to merchants and consumers are fully protected from
fraudulent transactions with our zero liability policy. Ultimately, debit
products are about accessing people's money in their bank accounts and they
need to offer strong protections. Debit is our expertise. When we have
control over the payments environment, our leadership in fraud prevention
across our payment solutions is evident.
Canadians love using our products, and getting these payment solutions
accessible through mobile channels is a given. Last year, we successfully
completed the first NFC mobile debit transactions in Canada and were among
the first globally for a domestic debit network. As you heard in testimony
from RBC, the RBC Wallet, powered by RBC Secure Cloud, is enabled with
Interac Flash so RBC customers can use the RBC Wallet to make payments
anywhere Interac Flash is accepted. In addition, our leading Interac
e-Transfer P2P solution is also widely offered through financial
institutions' mobile banking platforms.
We are actively working with financial institutions to support their
mobile implementations, ensuring that customers will have the choice to use
debit to pay with their mobile device. Ultimately, we will continue to
innovate and go where there is consumer and merchant need and where it makes
Canada has a highly competitive and innovative payments environment, and
additional competition is constantly emerging. As you heard, the range of
non-traditional players involved in the payments system continues to expand,
as do the array of business and technology models through which payment
services are delivered to consumers, merchants and small and medium-sized
businesses and large businesses.
By developing the Code of Conduct for the Credit and Debit Card Industry
in Canada in 2010, the government clearly recognized the need for stronger
checks and balances to address the obfuscation and other tactics that had
the potential to create an unhealthy competitive environment in the retail
payments environment. We firmly believe that the code and underlying public
policy objectives should be maintained for payment technologies, including
mobile, and should be considered a foundation for future efforts.
In summary, we are focused on bringing innovations to the payments
marketplace and believe that new products and enhancements should derive
tangible value to end users. With this forward-looking focus, it is our view
that the regulatory framework should continue to evolve to alleviate any
competitive inequities and to allow for a smooth path for payments
innovation. I look forward four your questions.
The Chair: Thank you for your opening comments. Mr. Murphy.
Barry Murphy, Director, Government Relations, Canada and Latin
America, PayPal: Mr. Chairman, good morning and thank you for the
opportunity to be here today. I'm the director of government relations for
PayPal in Canada. PayPal is an eBay Inc. company. eBay connects millions of
buyers and sellers through the world's largest global online marketplace,
and eBay enabled $205 billion in global commerce last year. PayPal was
founded in 1998 to allow users to transfer money or pay securely online.
PayPal has 148 million active registered accounts globally and 5.5 million
here in Canada.
PayPal's roots in the payments industry have always been digital and
mobile. Today, PayPal is at the forefront of digital commerce by helping
businesses compete and by providing people with simple, secure ways to shop,
donate or send money. One dollar in every $6 spent on e-commerce globally is
spent through PayPal.
Allow me to describe how PayPal works. You sign up for a free PayPal
account either online or with the PayPal mobile app. You then link your bank
account, credit and/or debit cards to that account. This enables you to make
highly secure transactions online without sharing any of your account
Security is the fundamental building block of PayPal's business. PayPal
allows people to send money or pay for goods and services without having to
expose their financial and banking information to businesses or other PayPal
users. It also allows businesses to receive payments without the cost and
potential liability associated with processing and securing sensitive
In your physical wallet, you probably have cash, a debit card and a
credit card or two. Think of PayPal as your digital wallet, where you access
your money from your PayPal account, on your laptop or smartphone, to shop
online across Canada and millions of places globally.
I know this committee has been looking at issues surrounding digital and
virtual currencies. While PayPal is a digital payments company, it does not
accept virtual currencies for payment. We do believe that bitcoin may play
an important role in payments in the future, and we're actively looking at
ways to enable it within PayPal, but for now we have no plans.
Online commerce is booming across Canada. Fifty-six per cent of Canadian
Internet users said they bought goods or services online last year. However,
businesses in Canada are at the early stages of their online journey as only
20 per cent of them sell online, according to recent data.
Small businesses are a critical engine of the Canadian economy. Every
five minutes, a small business signs up to accept PayPal payments and opens
their virtual doors to new consumers in Canada and around the world. There
are no set-up costs associated or hidden fees for a small business to start
accepting payments in multiple currencies via PayPal. Our fees are
transparent and published on our website.
Led by mobile, the next commerce revolution is under way. Sixty-two per
cent of Canadians have a smartphone, the third highest penetration rate in
the world. Smartphones are an everyday necessity. This is changing how we
shop and pay and how businesses interact with their customers. Last year,
PayPal processed $27 billion in mobile payments, up from $600 million just
three years ago.
PayPal has been processing mobile payments securely since 2006, and
Canadians have been using their PayPal accounts to shop for clothing, toys
and even car parts from their mobile devices.
We recently teamed up with a Canadian point-of-sale company to offer an
innovative new way for cafés, food trucks and restaurants in Toronto to
accept payments via PayPal. Using the PayPal mobile app, people can now pay
at more than 80 cafés and restaurants in downtown Toronto.
To conclude, PayPal is focused on creating simple and secure experiences
so people can shop, donate or send money anytime, anywhere, using any device
of their choice. PayPal is helping Canadian businesses of all sizes take
advantage of online and mobile commerce and connect with PayPal's 148
million registered accounts around the world.
Thank you again for the opportunity to be here, and I look forward to
The Chair: Thank you for your opening comments. I will start with
Senator Bellemare: Thank you for being here with us. My first
question is about the costs and benefits. Based on your business plan,
people are using Interac and PayPal more and more. Can you compare the costs
for consumers using your method of payment and those using digital currency?
Is it more beneficial to use Interac or PayPal than digital currency? I
am guessing that consumers must pay some fees.
You must have made comparisons. Can you provide us with details?
Mr. Murphy: While I'm not familiar with the cost structure of the
virtual currencies, I do know for our consumers, PayPal is free to use. If
there are transaction costs associated with using a virtual currency for the
consumer, then, obviously, I think we provide a better value for the
consumer in that case.
Senator Bellemare: Who pays for PayPal services? Is it the sellers
or the retailers?
Mr. Murphy: It's the seller. The merchants pay the fees.
Ms. Hubberstey: For Interac, the transactions for a consumer would
be part of one's banking package. For example, I have a banking package and
I get unlimited debits, whether that's cheque, cash withdrawal or whether
I'm paying at a retailer with Interac Debit.
On the other side, for the merchants, we are an incredibly low-cost
option for merchants to accept payments. Our wholesale rate to the market is
0.65 of one penny. The payment provider then marks it up, a Moneris or Chase
payment. The average in Canada is 3 to 5 cents for a merchant, depending on
the size of merchant and transaction. When I talk about cost, we're low-cost
for use and acceptance.
Senator Bellemare: My understanding is that there are costs that
might not be visible, but they are there somewhere. They are distributed in
all sorts of ways.
I read an article with a quote from a Goldman Sachs Investment Banking
report. It was a quote by Michael Citrome, a tax litigation lawyer for
Spiegel Sohmer, and I quote:
If I were payment processor like PayPal or Moneris, I would be very
worried about the rise of virtual currencies and how they are going to
affect my business.
Can you elaborate on that quote?
Mr. Murphy: I have not seen the article. I'm sure there are people
in our company who are watching virtual currencies very closely, both how
they develop and how they may interact with our products in the future.
Whether they are worried about that or not, I honestly don't know.
Ms. Hubberstey: As I said in my opening comments, the payments
marketplace is one of the most highly competitive and active, probably more
than any other part of financial services today, and I think everybody is
putting out a value proposition to users. I talked about providing that
value to the end users, and that's what we do every day, trying to make sure
that you want to be top of physical wallet or top of virtual wallet. You
want people to choose you so you put that value proposition, and part of our
big value proposition is low fraud. We're accessing people's money in their
bank accounts, and they want to make sure that that's protected. That's what
we drive to do — protect the money in their bank accounts.
Senator Bellemare: You talked about a code. Can the code apply to
Ms. Hubberstey: It was developed to deal with the issues happening
at the retail payments base. I think it has been an effective tool to be
able to deal with those issues. I think as you look at the area of virtual
currencies, it would be interesting to look at it. I wouldn't say it is
necessarily applicable, but it's something to look at.
Senator Maltais: Two things should be clarified. First of all, we
have to rush to finish this study, because our chair is getting richer by
the day with his bitcoins, which is making me have second thoughts about my
decision not to buy them.
My question is for Ms. Hubberstey. Could the ATMs that we find in banks
and many other public places include bitcoins one day?
Ms. Hubberstey: At this point in time, we do not process any of
the bitcoin transactions. We have a rule framework in place that any ABM
that is connected to our network must follow, whether that's private label
or financial institution. At this time, there are no plans. I can't predict
the future, but at this time there are no plans to.
Senator Maltais: Precisely, bitcoins are virtual currency, the
transaction of tomorrow, based on what we are hearing. Rather than having
two or three types of machines for transactions, could there be only one
machine to include bitcoin transactions and normal transactions alike? That
might be useful for everyone.
Ms. Hubberstey: As I said, at this time, what our system does is
connect people to their bank accounts, their financial institution. That's
the role we play and that's our network itself.
Whether there is opportunity in the future, certainly, virtual currency
is an issue that everybody, like my colleague at PayPal, is looking at quite
closely. This study is very proactive on the Senate Banking Committee's part
in looking at the issues around it. I think all stakeholders who are
watching this are looking at their own systems to see whether there will be
an impact in the future. I think that's a question that everybody is
considering for their own systems, and certainly one we're looking at in
terms of how this will play in the future. I don't have any answers for you
today as to whether that will happen, but it's certainly something that we
all look at.
Senator Maltais: We receive many complaints from people who have
been victims of hacking attempts at Interac machines. I had an experience
like this with my daughter, on December 24 — which is not the best day to
have your account locked, especially when you are doing groceries.
Who is responsible in cases like that? Does the bank call us and try to
help us out as soon as possible? As soon as there is an attempt — I am not
sure how it is done — our bank card is blocked and we receive a call to let
us know that there is a problem. Is this the bank's responsibility or
Ms. Hubberstey: It's a partnership. Your relationship is with your
financial institution, so they are the contact; they contact you directly.
We work in partnership with financial institutions to prevent and detect
fraud. This is a collaborative effort; it's everybody's role. So we work
very closely with financial institutions, law enforcement and others to make
sure that we are monitoring and detecting for fraudulent activity, to make
sure that your funds are protected, that if there is criminal activity going
on, there's an attempt, that is prevented.
Senator Maltais: I think your system is impeccably effective.
Within 30 to 35 minutes, the account is blocked if there is a fraud attempt.
When that happens, we can no longer withdraw funds and we can no longer use
our card. In my view, your system works perfectly. Does PayPal work in the
Mr. Murphy: Senator, we do take fraud very seriously and we have
significant resources in our company to detect and prevent fraud. We also
work very closely with our financial institution partners. In addition to
all those efforts, we also have what we call buyer protection and seller
protection. So if there is a problem with a transaction, we fully back that
transaction and protect the buyer or the seller, or in some cases both, and
make them whole, if there is a problem.
Senator Massicotte: Thank you for being with us this morning. You
are obviously two very important contributors to our payment system. Thank
you for your contribution.
To put your experience in perspective, could you tell me, if you look at
the number of transactions in Canada, what percentage is Interac and what
percentage is PayPal, of the total number of transactions? And maybe what
percentage is cash, if you wish.
Ms. Hubberstey: When you look at electronic payments, Interac is
around 55 per cent of all card-based transactions, and that's versus credit
card combined, so it's electronic. Where you still see cash as a heavy
player is in the low-ticket space, the under $20. When you start to factor
that in, it's still relevant, but a lot of these contact technologies, like
our Interac Flash, are to move into that space to try to take market share
Do you want to speak to the PayPal and that side of things?
Mr. Murphy: Sure. The percentage I gave globally of one in six
e-commerce transactions being through PayPal, I think that number is
probably fairly consistent in Canada, so that puts us at about 15 per cent.
We do approximately 9 million transactions a day globally, so I would guess
the number, if you took the Canadian population and did quick math, is
probably similar to that.
Senator Massicotte: Fifteen per cent of all Canadians' electronic
transactions are PayPal and 55 per cent are Interac?
Ms. Hubberstey: They're different. PayPal is more the e-commerce
side of things.
Senator Massicotte: Yes, I appreciate that.
Ms. Hubberstey: I'm speaking more of the card-based. We do have a
P2P money transfer service. We also have Interac Online. Our transactions
are about 12 million daily within Canada, so we're very much domestic. To do
the pie chart and split things out, it would be a bit of comparing different
methods, different forms.
Senator Massicotte: Both of you are experts. Obviously, you know
your merchants very well, because they're your customers. They're the
intermediary for which people use your product.
Having said that, I want to pick your brain a little bit. The current
code of conduct of the merchants of card-based transactions allows
merchants, since approximately a couple of years ago, to offer discounts to
In both your cases — compared to, say, credit cards — you are
significantly cheaper and less expensive to use. Therefore, there's no
question some merchants would favour customers paying via your services
rather than with credit cards. It looks like the credit card market — and
your own, Interac — you're being challenged in the last couple of years.
They are doing a pretty good job of capturing the marketplace.
What is it the merchants offering part of that cost to discount through
their customers to favour you and also favour themselves?
Ms. Hubberstey: It is certainly a conversation we're having with
the merchant community. It's an active conversation. You point out that the
code of conduct has a provision to allow for merchants to discount paying
with Interac Debit.
What we tend to see is that smaller merchants do it. We're working with
the Canadian Federation of Independent Business, and they're doing an active
outreach to the small business community to talk about those choices that
they have and to be able to offer that discount. As you point out, there's a
benefit to them for a customer pulling out Interac versus their premium
I think that's something that will continue to increase, but it's
certainly an active conversation that we're having with merchants to educate
them about that ability.
Senator Massicotte: I don't see it anywhere. I don't know of any
merchants offering that discount.
Ms. Hubberstey: I live in the Beaches area of Toronto and I see a
lot in my local community. I see merchants, particularly small restaurants,
that are accepting Interac and cash. They do not accept credit card payments
because they can't afford the cost. I see others offering a discount if it's
cash or Interac.
The code has been out since mid-2010. I know it's four years later, but I
think this is a matter of educating, and it's an active role we're playing
in educating the merchant community about that opportunity.
Mr. Murphy: If I may, the PayPal relationship with the merchant is
slightly different in the sense that we offer very transparent flat-rate
pricing. It's available on our website. The merchant knows exactly what
they're going to pay for the transactions they process using PayPal.
It does not matter to the merchant what funding source you use within
your PayPal wallet to pay that. So if you're funding it with a very
expensive credit card, the merchant is still paying the flat fee. So it's a
slightly different relationship that we have with the merchants. We say
we're charging you this percentage; that's it.
Senator Massicotte: While we have Interac here, a couple of years
ago, from my knowledge, even Interac business, the debit card flat fee, was
being challenged by some new entrants to the marketplace, whereby Visa and
MasterCard were also introducing their debit cards, but not on a flat-fee
basis or not as cheap as yours.
How are they doing compared to yours? Are they capturing a greater share
of the marketplace? Does the consumer know the difference?
Ms. Hubberstey: Certainly we have a multi-debit network now in
Canada. I think our biggest competition right now is credit. Canadian
consumers tend not to make a big differentiation between credit and debit.
They're putting their coffee and sandwich on a credit card equally as
pulling out Interac. So that, right now, is our more imminent competitive
We are still low cost. If I compare a bag of groceries at your local
grocery store, they probably pay around 3 to 4 cents for a $100 bag from
paying with Interac, and that's whether it's $100, $200 or $300. For a
competitive Visa debit, it would be around 40 cents; and then up, $200 bag,
80 cents; and a basic credit card would be, at minimum, $1.50. Then you add
premium on top of that, and that escalates as the bag of groceries
But for us, we're still flat fee and we still offer that value
proposition to merchants. That is our strategic approach.
Senator Massicotte: So the Visa, MasterCard debit cards are 10
times yours, and the credit card is actually 10 times their own debit card.
Yet there's no differentiation; the merchant is not yelling for help.
Ms. Hubberstey: Right now, the way the code of conduct came in,
Provision 6 said that you can't have competitive offerings on the same card
going after the same transaction type. The strategy was that basically they
would ride our ubiquitous acceptance for a period of time and then we get
kicked off the card once all merchants accept it.
Right now, the code prohibits competitive networks from competing for the
same transaction type. So you do see co-batched cards today, Visa Debit and
Interac. Interac is for point-of-sale domestically, the Visa Debit is for
online international point-of-sale debit and for e-commerce.
Senator Ringuette: Thank you for being here.
My question will start with Mr. Murphy. Am I correct in assuming that
PayPal is not part of the Canadian payments system regulation?
Mr. Murphy: That is correct.
Senator Ringuette: So PayPal is not regulated in Canada, in
comparison to Interac and so forth?
Mr. Murphy: That is correct.
Senator Ringuette: What would be your fraud file? Do you have a
fraud file? Are you susceptible to fraud? Earlier you said that you would
compensate both the customer and the merchant in such a case. So what is
your fraud risk?
Mr. Murphy: We have significant resources at the corporate level
that we apply to all our transactions globally to reduce the rate of fraud.
I do not know exactly what our fraud percentage is, but I know it's
extremely low. In addition to that, as I said, we have the buyer and seller
protections that we believe protect the consumers and the merchants in the
Senator Ringuette: I understand the PayPal process. The consumer
puts an amount of money into a PayPal account and uses that to pay for
merchandise. You're a facilitator, shall I say, in the process.
Mr. Murphy: The example you gave is that someone put money in a
PayPal account. That's one way that people can fund a transaction through
PayPal. Many fund it through a direct connection with their bank account.
Many fund it directly with a credit card. So in addition to our fraud
controls, you also have our financial partners who are also very involved in
Senator Ringuette: So from the merchant perspective in that
scenario, the merchant would have to pay the rate of non-present consumer.
Mr. Murphy: The merchant pays the flat rate that we provide, that
we charge the merchant, regardless of how the individual customer funds the
Senator Ringuette: Who assumes the credit card cost? You assume
the merchant credit card cost?
Mr. Murphy: In that case, we are paying the interchange fee, if
it's funded by a credit card.
Senator Ringuette: Yes, I understand that. Let's say, for
instance, at a rate of 3 per cent credit card merchant fees, what would be
your pass-on rate to a merchant?
Mr. Murphy: Our rates are on our website. Our standard rate is 2.9
per cent plus 30 cents. In that case, it's essentially 3.2 per cent. We
would probably be losing some money in the transaction.
Senator Ringuette: Interesting. Yes, I'm very much interested in
the entire credit card scenario, but initially we're having this meeting to
discuss the issue of bitcoin and bit payment. Which one of you would be more
susceptible in the near future to accept a transaction with bitcoins?
Ms. Hubberstey: Right now, our model is right into the bank
account of a consumer. So our model today does not see an association with
the bitcoin or the virtual currency piece.
Senator Ringuette: So in order for Interac to enable bitcoin
payments, your bank would have to accept a bitcoin account?
Ms. Hubberstey: Yes, exactly.
Senator Ringuette: Mr. Murphy?
Mr. Murphy: That would be similar for a PayPal account as well. We
would have to decide to allow bitcoin as a payment mechanism within the
PayPal wallet. We have no plans to do that at this time. We're watching it
carefully, looking at all the issues surrounding security, fraud and
transparency. But at this time, we have no plans to implement it in the
Senator Tkachuk: Just a couple of questions, because we are here
looking at digital currency. For a digital currency like bitcoin to be
useful, would it not require organizations like yours to be used? In other
words, how could bitcoin be used without you?
Mr. Murphy: I think the simple answer right now is transactions
that are occurring with bitcoin are essentially peer- to-peer transactions,
separate from the traditional financial payment mechanisms that we and
others represent. It really is, "I want to pay you in bitcoin; therefore, I
buy bitcoins, I send them to you." I'm not an expert. I don't know how that
transaction works or what the charges or fees are, but right now it's
completely separate from the traditional financial payment networks. For it
to come into our networks, we would have to be the ones who chose to do so.
Senator Tkachuk: Bitcoin is sort of like a foreign currency, in
the sense that to get universal access of the cash or value that's
represented in the bitcoin, for instance, if you want to go buy a shirt
downtown, you can't use that bitcoin if it only has minimal use by
retailers. Sooner or later, that bitcoin has to be exchanged for the
currency of the marketplace you're in, whether it's U.S. or Canadian dollars
or euros. If we see it that way, then your bitcoin would have to become part
of the regular financial marketplace before it could be useful on a
universal basis. That is what I'm trying to get at, I would guess.
Mr. Murphy: I think that's accurate.
Senator Tkachuk: I'm not sure, but I think I'm getting it, so I'm
The Chair: I'm going to move to round two.
Senator Massicotte: Further to what Senator Tkachuk said, his
words are complicated, but what you're really saying is that the reason you
don't get into the bitcoin is because it's not very dominant or voluminous.
It's not used very much, still a very marginal player; is that the case?
Mr. Murphy: I think that's accurate. There's a question of what
added value it provides. We're looking at things from what provides the best
value and security for our consumers, and we're still looking.
Senator Massicotte: The second point is just to make sure everyone
understands how you answered Senator Ringuette's question. She noted and you
agreed that you're not part of the Canadian payment system. To some people,
that may connote a negative, a level of risk, but you may want to clarify.
Does that signify you're less acceptable and you have no regulations
affecting you, and are you therefore a player of higher risk for those who
want to use your services?
Mr. Murphy: No, I don't believe so, because of the amount of
resources and energy we put into fraud prevention and security. We are tied
into financial institutions all over the globe, in Canada and elsewhere,
where our customers fund their accounts using credit cards, debit cards or
bank accounts, and we have the connections into the members of the Canadian
Payments Association and the regulated entities. And then we are sort of in
the middle and managing the transactions.
The additional piece that I think is very important to understand is that
when you are using PayPal either to send money to someone or to buy a
product or service online, we see both sides of the transaction. So we know
who the payer is, and we know who the merchant is. There is much more
transparency in that system than might otherwise exist.
Senator Massicotte: In that sense, you are the bank account.
You're actually doing a cross-change of payments.
Mr. Murphy: I wouldn't say that.
Senator Massicotte: But in function you are.
Mr. Murphy: We do manage the flow between one entity and the
other, and we see both sides of the transaction. That provides a greater
deal of security, I think.
Senator Bellemare: I will ask you a question that is more of a
statement, and I would like to hear what you have to say.
We have heard a lot of people talk about bitcoins and the payment system.
Digital currency claims to eliminate intermediaries. Based on what you said,
I understand that digital currency is one of your major competitors, because
you are an intermediary, and they claim to eliminate intermediaries by
dealing directly with the individuals. Your business model can claim
security compared to bitcoins. We have seen that fraud can occur with
bitcoins. Is my statement correct?
Mr. Murphy: The general statement is correct. We provide a level
of security and transparency into the transaction. As I said upfront, I'm
not an expert in bitcoin. I don't know the transaction flows. I don't know
the costs associated with each step along the transaction.
However, in addition to security and transparency, we also can provide
great benefit to the consumer and the merchant.
Senator Bellemare: Bitcoin experts have told us that their payment
system is one of the most transparent systems, because their computer code
can always show who is buying and who is receiving. I cannot tell whether
this method is more transparent or less so. However, it is not as opaque as
we might think, and it is very easy to check who conducted the transactions.
The bitcoin business model seeks to revolutionize payment mechanisms by
reducing intermediary fees. That is really the message being sent in terms
of the intermediary fee system, which relies on banks.
Ms. Hubberstey: I say often to people that I've been in financial
services for decades now; I will date myself. Payments is probably one of
the most hotly contested, competitive areas of financial services today.
We're looking at all sorts of new players that want a piece: Google,
Facebook, et cetera. It's dynamic.
You're looking at your business model, and you're saying, "What value do
we bring to our users?" For us, we are direct into your bank account. You
can't be more transparent. Everything is online with real-time payments. You
see everything documented. Our value proposition is one of low cost.
But one of the ones we hold dear, whether it's Interac e-Transfer,
Interac Online, our debit products, is security. We build products for the
Canadian marketplace. We know Canadians want secure access to funds; they
don't want to worry about whether or not there's money when their mortgage
payment is hitting their account. These are important value propositions.
We invest a lot in technology and with our partners to do our utmost.
Seeing that fraud number come down year over year on the debit card side —
we're not done yet; we're not resting on our laurels. We want to continue to
drive criminals out of the Canadian marketplace when it comes to payments.
We don't want them using our network and affecting the clients who are using
our services. That is the number one value prop we bring.
Senator Ringuette: I have another question for Mr. Murphy. Your
data processing equipment resides where — in Canada? Is it in the U.S.?
Where is it?
Mr. Murphy: Predominantly in the U.S.
Senator Ringuette: Therefore, just like Visa and MasterCard, all
transactions within the PayPal system — all that information and processing
— are in the U.S.
Mr. Murphy: I believe that's how —
Senator Ringuette: And it's not subject to the Privacy Act in
Mr. Murphy: I'm not certain about that; I can get you an answer on
that. I know that we take privacy very seriously and work closely with the
Privacy Commissioner and others to make sure we are meeting the needs of
Senator Ringuette: Bear in mind that this is your first appearance
before this committee, and we have so much interest in the issues of payment
entities such as yours.
For instance, since you are not part of Canada's payments system, this
committee also looked a few years ago into the money laundering aspect and
all the current regulations that we have with regard to money laundering,
reporting to FINTRAC and so forth. Are you subject to that regulation?
Mr. Murphy: We are subject to money laundering regulations
throughout the globe — not here in Canada.
Senator Ringuette: Not here in Canada. Okay, thank you.
Senator Massicotte: Can I have a supplementary on that?
The Chair: Absolutely.
Senator Massicotte: I just want to make sure of your last answer.
You're not subject to Canadian legislation relative to money laundering. Is
that what you said?
Mr. Murphy: Yes.
Senator Massicotte: Therefore, if somebody deposits $10,000 or
$15,000 cash into a PayPal account in Canada, you have no obligation to
report that to FINTRAC to define its source?
Mr. Murphy: I don't know if we have an obligation to report that
to FINTRAC. I know our anti-fraud and anti- money laundering provisions that
we institute globally would certainly kick in on that, and we would take
Senator Massicotte: Let's say a Canadian deposits $15,000 into a
PayPal account. You're saying your corporate would respond and report that
to whom — to U.S. authorities or Canadian authorities?
Mr. Murphy: I don't know the specific answer. I can get you the
answer to that. I know it would not go undetected; I assure you of that. And
it wouldn't be something that would simply happen.
The Chair: Can you deposit directly into a PayPal account without
going into a bank account in Canada?
Mr. Murphy: No.
The Chair: Can you put in excess of $10,000 — to ask Senator
Massicotte's question — directly into a PayPal account without its having
come from a bank?
Mr. Murphy: Not unless you can do it from a credit card, no.
Senator Massicotte: So I can't send you an envelope with $15,000
to deposit into my PayPal account?
Mr. Murphy: Certainly not.
Senator Tkachuk: That was a question I was going to ask. That's
The Chair: Mr. Murphy, you indicated PayPal has been around for 15
or 16 years. You go back 17 years. You did nothing. Today, you're doing $205
billion. I'm not sure how long Interac has been around. How long?
Ms. Hubberstey: Thirty years this year.
The Chair: Bitcoin, as I recall, was somewhere in the area of
2009, so we're talking roughly five years. It's suggested there's somewhere
in the area of 12.5 million bitcoins in circulation at the present time.
From your perspective, I'd like to ask you to take a look into your own
crystal ball. What do you see in the next five years? How do you see the
landscape? You touched on this briefly, Ms. Hubberstey — that you're always
under attack and which way it may go — but what do you see?
Ms. Hubberstey: Certainly, the next avenue is definitely mobile,
mobilization of payments, using your mobile device to make payments, being
able to walk through a drugstore and just bar code and you're tallying
things up and making a payment and out you go. You might not even go through
Interestingly enough, if you step back three years ago, I think people
would have predicted mobile payments would be more present than they are
today. I think it has not been a revolution but an evolution in how payments
I go back to the point that it's an exciting time in payments. I think
it's very difficult to predict five years out. I would say, though, that if
there is a sure bet, the mobilization of payments is certainly a place that
it's going. When we've been talking to the Department of Finance about the
code of conduct, the need to mobilize the code, making it applicable to
mobile payments, has been a priority. Certainly the government is taking
that step. If there's a bet, that would be a first step.
Mr. Murphy: I would agree with that. Even the mobile payments
industry is changing rapidly. There are new competitors entering every day.
There are companies down in Silicon Valley, some of whom are staffed with
our former employees, who have received significant amounts of funding and
have not released a product yet. So it's an exciting time to be in the
payments industry. I think that we're going to continue to do what we do
well, and watch the competitors.
You mentioned 12.5 million bitcoins or so in circulation at this point.
That's fairly significant. I think it pales in comparison to the numbers you
were hearing from Caroline and myself for what processes through our
systems, but it's an exciting time. There will be significant additional
change over the course of the next several years.
Ms. Hubberstey: I would add one thing, that there's a lot of this
sort of machination of things happening in the middle. I pointed out in my
opening comments the need to take into consideration the end users. What's
the value to them? For a consumer, what's the value for me to move into
something else? I have my card or something else. It works well. Part of
that is that we see the value. One of the value propositions is privacy of
information, security of my funds. For the merchant community, that is a
value. I'm not going to pay a higher cost if it's of no value. Where is the
other value attached to making sure I get my funds and I get to sell my
goods? Am I going to sell more goods if I'm in another area? It might be a
value to me.
I think it is looking at those pieces to ask, "Is it of value?"
Senator Tkachuk: I have a question on the mobile phone. Do mobile
phones store information when you use mobile phones to make payments?
Ms. Hubberstey: There are different models, but the security of
the information, you would have certain credentials that are secured;
they're the secure element within the phone or a secure element within a
cloud, but those are all encrypted and highly secure.
Mr. Murphy: In our case, the transactions occur in the cloud, if
you will, so no data is stored on the phone.
Senator Tkachuk: There's no data stored on the phone. If you lost
your phone, you wouldn't want a lot of stuff in there, I would think.
Ms. Hubberstey: You probably know that you've lost your phone
before you've lost your wallet these days.
The Chair: To our panel, on behalf of the committee, thank you
very much for appearing before us. You've been very helpful in our
As I mentioned earlier today, in our second hour we have a representative
from BitPay, which is an electronic payment processing system for the
bitcoin currency. It enables online merchants to accept bitcoins as a form
of payment. Today we welcome, by video conference from Atlanta, Tim Byun,
Chief Compliance Officer of BitPay. With 21 years of experience as a risk
officer, Mr. Byun has worked at Visa, the Federal Reserve Bank of San
Francisco, the Federal Deposit Insurance Corporation, which is the American
equivalent of CDIC, the Canada Deposit Insurance Corporation, and as
vice-president, credit administration, for the Asahi Bank Ltd.
Mr. Byun, we are delighted to have you with us here today. The floor is
Tim Byun, Chief Compliance Officer, BitPay: Thank you,
distinguished members of the committee, for the opportunity to speak with
you today. My name is Tim Byun, and I'm the chief compliance officer of
BitPay, a merchant processor that is headquartered in Atlanta, Georgia. I
appreciate your interest and study of the use of digital currencies. Since
bitcoin represents the dominant share of digital currencies, my testimony
will focus on bitcoin specifically and not on any of the alternative digital
currencies. I will also spend a few minutes to discuss BitPay, as we are a
leader in enabling merchants to accept bitcoins as payment.
BitPay was started in May 2011 by co-founders Tony Gallippi and Stephen
Pair, who both still lead our start-up company today. Over the past three
years, BitPay has acquired over 30,000 merchants to accept bitcoins. Our
merchants include many small and medium-sized businesses who accept bitcoin
often side by side with credit cards and other forms of payment. Our role in
the bitcoin ecosystem is very close to that of the traditional merchant
acquirers in the credit card space. We act as an agent of the payee to help
merchants clear and settle transactions over the bitcoin network. Merchants
could accept bitcoin directly, but automating this is very difficult and
complex, and, therefore, merchants choose us, including our software and
To fight money laundering and terrorist financing, BitPay has a strict
know-your-customer policy to verify all of our merchant applications. We
need to know who our merchants are and what they're selling. We only want
the good merchants using our service; therefore, we conduct additional due
diligence and at times suspend and terminate those who violate our terms of
use, a copy of which was shared today as an exhibit. Our strict policies to
comply with laws and protect our brand have earned BitPay the reputation as
a leader and well-respected company in the payment space.
While BitPay is a merchant processor, for clarity, BitPay is not a money
service business. BitPay is not a bitcoin wallet provider, nor does it serve
as a bitcoin exchange. We do not offer any bitcoin services for consumers.
Consumers pay merchants from a bitcoin wallet that they have chosen for
Even though we deal with bitcoins, our business model of merchant
processing or merchant acquiring, as it is typically called in the credit
card industry, is fairly traditional. Merchant acquiring began in the 1950s
with credit cards and the big marketing push to get businesses to accept
credit cards as payment. Over the years, companies such as First Data, TSYS,
Fiserv and others would emerge with new tools to better service merchants.
These companies are typically not household names. They operate behind the
scenes, facilitating merchant payment acceptance as a business-to- business
service. Most consumers, even when making a payment through one of these
service providers, don't even know that these companies exist.
Fast-forward 40 years to the 1990s with the launch of the World Wide Web
and the first Web browser. Businesses could now build a website to reach
consumers, but how could they take a payment from a webpage? It was the mail
order companies that first figured this out. If they could accept a credit
card payment over the phone, then perhaps they could also accept a credit
card over the Internet. Companies like CyberSource and Authorize.net built
payment gateways for processing credit cards over the Internet, and today,
20 years later, credit cards are still the most widely used form of payment
over the Internet.
However, credit cards were never designed for the Internet and,
therefore, have some significant vulnerabilities as a payment source. For
example, last year, over 12 million people became victims of identity theft,
mostly from shopping online. Businesses lose over $20 billion per year due
to payment fraud. The acquiring and issuing banks don't take full
responsibility for the fraud and often pass on the losses to merchants. If
you are a business owner, it is often your loss when accepting a stolen
credit card, even if the bank approved it. Credit card fees are significant
to merchants, with the highest fees paid by the smallest mom and pop
businesses and the lowest-income consumers. Bitcoin is a cheaper, faster and
more secure payment system.
There are major differences between credit cards and bitcoins. Credit
cards are "pull" transactions. The shopper provides their account number
and secret credentials that the business can use to pull money from their
account. The problem is that the same credentials to pull legitimately one
time can be used to pull money many more times by that same business or by
anyone who has these credentials. This is the fundamental design problem
with credit cards, and it is the root cause of the identity theft and fraud
that we see today.
Think about that for a minute. Why would you give someone full access to
your, say, $20,000 line of credit to pay them just $20?
In 2009, bitcoin was invented as an open-standard, open-protocol and
open-source payment network, basically free to everybody. Bitcoin takes
everything we know about the Internet, security and cryptography and builds
a payment system designed for the Internet. Nobody, no one person, owns the
network, and nobody controls the network. All of the users collectively own
the network, its rules and its ledger. Anyone can use bitcoin or build an
application on top of bitcoin. Bitcoin is much like the Internet itself,
where anyone can use the Internet and build an application on top of their
Bitcoin payments are "push" transactions. If I want to pay someone, I
push them the exact amount I want to give them. The recipient does not have
my account number. They do not have my secret credentials, and they do not
get any permission to pull money from my account. Only I can push out the
payment. Bitcoin works similar to email and text messages, as an example.
You cannot pull an email or text message from me. I can only push the
message to you. Bitcoin works the same way for payments.
For consumers, bitcoin is simply another choice of payment. One of the
main reasons why a consumer would choose to pay with bitcoin is that bitcoin
can reduce, if not completely eliminate, the risk of the consumer becoming a
victim of identity theft. Identity theft happens when a criminal gets access
to the victim's account number and credit card credentials and uses those
credentials to make unauthorized purchases. When using bitcoin, the consumer
never provides their identity to make a payment, so there is no identity
information to steal and no risk of identity theft. Bitcoin is a massive win
for consumers, saving 12 million people per year the expense and hassle of
dealing with the fallout of identity theft.
For businesses, bitcoin can also stop the $20 billion per year fraud
problem. When your business receives a bitcoin payment, it's confirmed. It's
yours. It cannot be reversed or taken away from you. Businesses can now
reach customers in emerging markets, from which they could not reasonably
collect payments before. It is the small mom and pop businesses that are
most excited about bitcoin and that represent the adoption today. The
businesses that accept bitcoin are now opening up to new markets and
Bitcoin does, however, have limitations that will keep it a small player
in the payments space for quite some time. Compared to credit cards — Visa,
as an example, can handle 20,000 transactions or more per second worldwide —
Bitcoin can handle seven — not 7,000 but 7 — transactions per second. Today
the average rate on the bitcoin network is one transaction per second. In
the collective networks of credit cards, debit cards, payment cards, ACH and
wires, there are 50,000 times more transactions taking place on traditional
networks than on the bitcoin network.
Bitcoin also has some limitations on its usability. The global money
supply of bitcoin is worth around $8 billion. Compare this with the global
M2 money supply of about $70 trillion. There is 8,000 times more money in
the world in traditional currencies than in bitcoin.
Even though it's small, bitcoin has invented something previously thought
to be impossible. Many times when parties transfer assets to each other they
are trading a digital representation of an asset, like a stock certificate.
The asset itself settles one to three days later. With bitcoin, it is now
possible to transfer an asset remotely and immediately settle the
transaction, with no counterparty risk. That type of instrument has never
The possibilities of this instant worldwide settlement are very
interesting. This is where the real potential for bitcoin exists. The
bitcoin block chain, which is the public accounting ledger of bitcoin, is a
large property database, if I can use that example. It can handle
quadrillions of individual asset accounts with a full chain of custody every
time an asset is transferred from one party to another.
It may sound exciting, but bitcoin is a disruptive technology. The
bitcoin will not replace the Canadian or U.S. dollar or the euro or gold,
but it could disrupt existing financial services and their fee structures.
Today banks, for example, charge many fees to consumers and merchants for
things such as overdraft, maintenance, authorization, processing, ATM use,
late payment, and even fees to send your paper statement in the mail. With
bitcoin, users are empowered and can handle many of their daily payment
needs for themselves and avoid such fees.
Bitcoin could also offer immediate cost reductions and technological
advancement to our financial institutions and communities, particularly in
the area of interbank settlement, international transfers and foreign
exchange. The current one-to-three-day settlement times that I illustrated
for many types of transactions can be reduced to one to three seconds.
Bitcoin is a technology with tremendous cost savings for businesses and
consumers and is a faster and more secure and affordable option for
transferring funds as a payment system.
In conclusion, bitcoin is in its infancy. It is much like the Internet in
the early 1990s. Thanks to prior governmental leadership, the Internet was
allowed to evolve and develop, which has greatly improved our lives.
If we look 10 to 20 years in the future, we will see many companies built
upon bitcoin-related technology. The original application of the Internet
was commerce with companies like Amazon and PayPal that you just heard from.
Over time, new and improved applications for the Internet emerged. Search,
social media, and big data are all powerful industries and values built upon
the Internet. Where would all of these free applications like social media
be today if the early Internet was overly regulated, thereby inhibiting
I commend the committee for studying the use of digital currencies and
the potential applications of this technology. Thank you for the opportunity
to speak today. I welcome any questions.
The Chair: Thank you for your opening statement. You referred to
the fact that BitPay has 30,000 merchants at present. Could you characterize
or profile the merchants for the committee? What does the portfolio look
Mr. Byun: Many of our merchants are small, mom and pop businesses.
As you may have seen in the press releases in the bitcoin ecosystem, slowly
more and more traditional companies are coming into play. Most recently,
yesterday, Expedia announced that they will accept bitcoins. Specific to the
Canadian market, the SPCA of British Columbia accepts bitcoins to purchase
merchandise. Another example is TigerDirect, an electronic store that
accepts bitcoins for electronic equipment.
Senator Bellemare: I have a few quick questions. The first is
technical in nature. You are saying that businesses have been losing $20
billion a year because of fraud. Are those losses from around the world or
just from the U.S.?
Mr. Byun: I think that is globally, and that was last year.
Unfortunately, this year we had a huge breach, as you know, with the Target
stores. Therefore, I suspect that that number will only increase.
Senator Bellemare: I would now like to talk about your company's
business model. You say that you are helping merchants use this new digital
currency technology. Can you briefly tell us how your technology works? What
do merchants have to pay? Is the bitcoin business model compatible with
credit cards, or is it entirely incompatible with traditional methods of
payment? In other words, you specialize in digital currency and it would
make no sense for you to provide traditional services at the same time.
My next question will be about identity theft.
Mr. Byun: That question has many parts. First, I do not believe
there is a bitcoin credit card in existence today. I hope there will be one
in the future, but that is not available now, in my opinion. More important,
the core of your question is what is the business model. How do we charge?
I'm glad to share with you that it's available/transparent on our BitPay.com
web page. We have some very reasonable plans, starting with the first one
that costs zero dollars but 1 per cent of transaction fees. More important,
we have other plans that start at $30 a month; and the next year of services
starting at $300 a month, fixed rate. Therefore, if you have many
transactions, obviously the $30 or $300 a month payment plan is the much
more reasonable cost.
I hope you can see that these are very nominal costs. Perhaps it's
because we want to share the innovation of bitcoin and the value proposition
that we are providing. We really want to motivate merchants to investigate
for themselves what bitcoin and BitPay can do for them, because we feel that
it is very cost-efficient for them.
Senator Bellemare: You are saying that merchant fees are not at
all linked to the volume of transactions. The more merchants use bitcoins,
the more they will be able to absorb the fees for your services?
Mr. Byun: Absolutely. If I may, I'll spend a few more seconds to
describe exactly the cost impact to merchants. As you know, merchants pay an
off-the-top interchange of roughly 3 per cent. They also incur the
fraudulent costs and chargebacks, which may run from 1 per cent to as high
as 10 per cent for some of these online merchants.
With bitcoin and with BitPay, we reduce that basically to the nominal
costs of $30 per month fixed rate, or $300 fixed rate or, if they do not
want to go with a monthly plan, zero dollars but 1 per cent of transactions.
I think that's very compelling.
Senator Bellemare: I have another question about identity theft.
You say that, with the bitcoin, identity cannot be stolen and that it is
very difficult to take the personal identifiers to defraud the consumer. How
is this lack of transparency compatible? Perhaps I am not using the right
term. How is this protection of identity compatible with your principle of
transparency? A number of experts have told us that the use of bitcoins is
very transparent and that the transaction history can be followed and even
the partners in a transaction can be identified. Can you reconcile these two
Mr. Byun: Yes, I'll try, because that is a great question.
When people talk about the transparency of bitcoin transactions, they are
primarily referring to the full transparency of the general ledger. Every
transaction that takes place is recorded on the general ledger, but the real
crux of that benefit is to ensure that bona fide or validated transactions
exist and that there is no double spending of bitcoins. That is more of a
validation system, and the general ledger is open and refreshed with every
However, in terms of privacy, when I send a bitcoin payment to you, I
personally have a public key and a private key, and I need to know your
public key, which is like your address, to send the bitcoin to, and I need
my private key to send my bitcoin to you to your public address. That
private key is never shared with anyone, and obviously is not recorded on
the ledger, only the public keys, and therefore there is full transparency
of how much my public address has sent to your public address. That is fully
available and transparent.
Senator Bellemare: Thank you for your enthusiasm. Your explanation
is very good.
Senator Hervieux-Payette: My biggest concern about bitcoins is the
fate of governments that have to collect sales taxes, the fate of companies
and the compatibility of all these transactions. You may say that individual
transactions are not very high in value. The bitcoin is not necessarily
considered to be currency and it still does not have the same value. At some
point, it might be worth 200 times more. Have you thought of the impacts
that the bitcoin might have on taxation?
Mr. Byun: The clarification that the U.S. has received from the
Internal Revenue Service is that bitcoin is classified as a property and
therefore merchants should record bitcoin payments just as they have
received payment as credit card payments or cash payments, and they must pay
income taxes on that. That is clear. I believe there will be more
clarifications of such by various countries.
Regarding the accounting side, it is the duty of all of us as consumers
or merchants to take care of our accounting responsibilities. As businesses,
we must account for how much income we are taking in or sales that we are
generating, whether it's through bitcoins, credit cards or cash.
Senator Hervieux-Payette: The currencies of various countries do
not increase by 200 per cent from month to month, whereas the value of the
bitcoin has skyrocketed and then dropped. You are suggesting that the value
of bitcoins can change significantly. How can we take this into
consideration, both in terms of taxation and accounting?
Mr. Byun: I believe many of the bitcoin ecosystem service
providers, such as BitPay, provide back-end systems to help merchants and
consumers account for their bitcoins, whether it's a personal wallet, and
whether it's individuals or institutions trading in bitcoins, to record
gains and losses, whether it's merchants accepting bitcoins, whether in
January, with a conversion equivalent to a dollar of X, or in July with a
conversion of X.
Yes, bitcoin market value is volatile. I think everyone would agree with
that. With the hope of additional adoption and more familiarity, perhaps the
volatility will reduce. However, I think we all live in a risky world. The
yen goes up and down, the U.S. dollar goes up and down, the Brazilian real
went significantly up and down this past year. That is part of the
volatility that has been experienced in bitcoin, but we can account for
that, and I believe even consumers and merchants can account for that.
Senator Tkachuk: Does your company operate like PayPal, or does it
operate like Interac? How do you get my payment from me, as a bitcoin
holder, to a car dealer or a retail merchant from whom I've made a purchase?
Mr. Byun: Similar to Canadian dollars being held at RBC with a
bank account, you as a consumer must have a wallet or you must have a
bitcoin bank account, if I can use those words liberally. There are service
providers such as Coinbase, Xapo and many others that are providing the
service like a bitcoin bank. Keep in mind these are service providers, and
therefore you are entrusting them to hold your bitcoins, which then you
could use to spend.
Senator Tkachuk: I'm asking this because I'm a small businessman
and I'm receiving bitcoins. That doesn't mean that my suppliers use bitcoins
or maybe only half of them or 75 per cent of them. Is there a lot of
liquidity in the bitcoin market so that I can take that bitcoin and turn it
into usable cash to pay my suppliers? Is there a significant transaction fee
Mr. Byun: That is the value proposition of BitPay. We take that
headache away from the merchants so they don't need to liquidate their own
bitcoins, but we will help them find that liquidation so if they choose to
they could get 100 per cent of their sales proceeds in their fiat currency
or a mixture of proportion, whether it's 90-10, 80-20, and so we can help
the merchants receive what they want.
In terms of whether it's difficult, that's why you see many service
providers popping up in the bitcoin space to help consumers as well as
merchants manage their bitcoins.
Senator Tkachuk: When I decide to use your services to accept
bitcoins for payment, I can say to you, "I want it only in Canadian
currency. That's how I want the final payment." Or I can say, "I want it
only in bitcoins."
Mr. Byun: Absolutely. You just touched upon your supplier. Let's
say you are a merchant who operates a restaurant and you have suppliers who
provide napkins, food and equipment. If any of them would like to receive
bitcoins as payment, then you can use your bitcoins to pay them. But, as you
mentioned, unfortunately the ubiquitous acceptance is nowhere close at this
time, and therefore merchants have requested a conversion into fiat
currency, so they can use their Canadian dollars to pay their vendors,
employees and suppliers.
Senator Tkachuk: Just one more question on the tax end. You
mentioned that in the United States a bitcoin is considered property. If I
receive a bitcoin payment — and let's use one bitcoin for $100, for example
— I have $100 worth of property, but I leave that $100 in my bitcoin
account, and the transaction that I just finished was based on one bitcoin,
$100. But at the end of the year, that bitcoin is worth $200. Do I pay tax
on the extra money as capital gain on that property? Because it hasn't yet
been converted to U.S. dollars; it's just sitting there valued at $200
rather than $100. I know I'm getting advice. I should be paying you, maybe.
Nonetheless, for us to understand this, we have to know this stuff.
Mr. Byun: Right. That's where the definition and clarification of
the IRS was clear. They made a judgment and clarification that it is indeed
property. While I'm not a CPA, I will do my best to address your question.
If you had a bitcoin that was worth $100 and you received it January 1,
and later in the year, December 1, you made a purchase for an electronic
good and it was worth $200, but you used that one bitcoin because it had
appreciated to $200, in my non-CPA expert opinion you would have a
short-term gain of $100, because that bitcoin has appreciated and you've
used that to consume goods worth $200 in fair value. Therefore, you would,
in essence, have a short-term gain of $100.
Senator Tkachuk: Via a capital gain?
Mr. Byun: Via capital gain, yes.
The Chair: Mr. Byun, if I could walk through in a simplistic way,
you have a merchant that has signed up with you, and they have a commodity
that I am interested in buying and they are listing that item at US$50. I
decide that I'd like to purchase that $50 item and I have sufficient bitcoin
in my wallet that I know, whatever the value is, is in excess of $50. As a
matter of fact, on one exchange this morning, it's $125. Could you walk me
through how I complete this transaction? Am I getting in touch with you, or
do I call the merchant?
Mr. Byun: Excellent question, and thank you for this opportunity
because it is so seamless.
So you go to your favourite merchant online. You click on the item that
you want, a $50 fancy cup set. The merchant will simply show the price in
the fiat currency, C$50. You click on it, and it's at the checkout process
that BitPay provides its real, valuable service.
If you say, "I want to pay by PayPal," the PayPal prompts will come up.
If you want to pay by bitcoin, guess what? A bitcoin conversion invoice will
pop up and will say, from your example of one bitcoin equals $150 Canadian,
it will say that you need a third of a bitcoin, 0.333 bitcoins. That will
prompt, and you will use your personal bitcoin wallet, wherever you have
chosen, to pay 0.333 bitcoins. That's how the merchant gets the equivalent
The Chair: As the customer, I don't really know anything about
BitPay. I'm dealing with the merchant who has made an arrangement with you,
and that's why it flashes up on the screen; is that correct?
Mr. Byun: Correct.
The Chair: I wouldn't know BitPay.
Mr. Byun: Correct. In the broadest sense, we are like an
information technology software provider, whether it's IBM or Oracle. We are
servicing the merchant as an agent for them to take bitcoins.
Senator Greene: Do you have any competitors?
Mr. Byun: We have many competitors, whether they are
bitcoin-focused providers, but we also see, in the competitive landscape,
that we are an alternative to Visa, MasterCard, American Express, Discover
Senator Greene: Yes, but within bitcoin do you have any
Mr. Byun: Yes. If I may share, and this is public knowledge out
there, we have many competitors, including Coinbase and BitNet, and they pop
up almost every day, as this is an open market and many competitors dive in.
Senator Greene: Do you offer the same services to other digital
Mr. Byun: Presently, we do not. We only provide services to back
bitcoin as a payment for our merchants. Partly it's because of, as your
colleagues have mentioned, the liquidity and breadth of using digital
currencies. Bitcoin, we feel, has good liquidity. With the alternative
currencies, time will tell.
The Chair: Mr. Byun, on behalf of the Senate Banking Committee,
I'd like to express our great appreciation for your participation with us
today. You've been an outstanding witness. You've been very helpful, and we
appreciate the time you've taken to be with us.
This meeting of the Banking Committee is concluded.