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 $25.14.

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 informative.

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 most sense.

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 details.

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 financial information.

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 your questions.

The Chair: Thank you for your opening comments. I will start with Senator Bellemare.


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 digital currencies?


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 Interac's?


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 same way?


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 there.

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 customers.

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 credit card.

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 threat.

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 escalates.

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 transaction.

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 these transactions.

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 transaction.

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 PayPal wallet.

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 good.

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 Canada.

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 Canadians.

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 additional steps.

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 very good.

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 a cashier.

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 are changing.

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 deliberations.

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 yours.

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 services.

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 themselves.

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 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 Internet.

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 creating jobs.

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 existed before.

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 innovation?

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 like?

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 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 facts?


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 validated transaction.

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 for that?

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 of C$50.

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 and PayPal.

Senator Greene: Yes, but within bitcoin do you have any competitors?

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 currencies?

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.

(The committee adjourned.)