Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 15 - Evidence - October 8, 2014
OTTAWA, Wednesday, October 8, 2014
The Standing Senate Committee on Banking, Trade and Commerce met this day
at 4:15 p.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
The Chair: Good afternoon. Today is the eleventh meeting in our
special study on the uses of digital currency, including the potential risks,
threats and advantages of these electronic forms of exchange. Still in the
concept stage, the committee has received presentations from the Department
of Finance, the Bank of Canada, the Canada Revenue Agency and the Canadian
Payments Association. We have heard testimony from academics in the fields
of economic and monetary history and in cryptography. The committee has also
received presentations from the Bitcoin Strategy Group, the bitcoin exchange
CAVIRTEX, and BitAccess, the makers of bitcoin ATMs, which I used to
purchase 0.18 bitcoin here at committee. Even though I have a substantial
loss at this point, I'm delighted to see Mr. Kemper, who facilitated that
transaction, in our audience today. We welcome you, sir.
We have also heard from companies involved in payment systems: Interac,
PayPal, Visa and MasterCard, all of which deal with fiat currency; and
BitPay, a payment system for bitcoin.
Last week, the committee returned to hearing witnesses directly involved
with one of the digital currencies, bitcoin: the Bitcoin Embassy, the
Bitcoin Alliance of Canada and the Bitcoin Foundation.
Today, we are pleased to welcome Mr. Andreas Antonopoulos, considered to
be the bitcoin guru. Suggested to us by several previous witnesses, Mr.
Antonopoulos is both an entrepreneur and an author in the field of bitcoin.
He is a computer sciences graduate from University College, London. His
expertise includes bitcoin, crypto-currencies, information security,
cryptography, cloud computing, data centres, Linux, open source and robotics
software development. He has had over 200 articles published in print and is
syndicated worldwide. In addition, he has been a certified information
system security professional for over 12 years and is a permanent host on ''Let's
Talk Bitcoin,'' a webcast devoted to bitcoin.
Mr. Antonopoulos is also a prolific public speaker, recently appearing at
the Toronto Bitcoin Expo 2014, held earlier this year, which I must tell our
committee our analysts also attended. Mr. Antonopoulos has literally written
the book on bitcoin, which is entitled, Mastering Bitcoin: Unlocking
It is with great pleasure that I turn the floor over to Mr. Antonopoulos
for his opening remarks to be followed by your astute questions.
Mr. Antonopoulos, welcome. The floor is yours, sir.
Andreas M. Antonopoulos, Author of Mastering Bitcoin, as an
individual: Thank you, chair and committee members. I appreciate the
opportunity to contribute to these proceedings about digital currency.
My experience is primarily in information security and its network
architecture. I have a master's degree in networks and distributed systems
and have worked in the field since 1992. I spent 20 years working on
networks and data centres for financial services companies before I found
bitcoin in late 2011. I have been working full-time in the bitcoin space for
the past two years and I have written a book on bitcoin for software
Today I welcome the opportunity to talk to you about bitcoin security,
the decentralized architecture that underpins bitcoin's security, and the
implications that architecture has for privacy, individual empowerment,
innovation and regulation.
Until the invention of bitcoin in 2008, security and decentralization
seemed like contrary concepts. Traditional models for financial payment
networks and banking rely on centralized control in order to provide
security. The architecture of a traditional financial network is built
around a central authority, such as a clearing house. As a result, security
and authority have to be vested in that central actor. The resulting
security model looks like a series of concentric circles, with very limited
access to the centre and increasing access as we move further away from the
centre. However, even the outermost circles cannot afford open access. In
such a security model, the system is carefully protected by controlling
access and ensuring that only vetted individuals and organizations can
connect to it.
The entities near the centre of a traditional financial network are
vested with enormous power, act with full authority, and therefore must be
carefully investigated, regulated and subject to oversight. Centralized
financial networks can never be fully open to innovation because their
security depends on access control. Incumbents in such networks effectively
utilize access control to stifle innovation and competition, presenting it
as consumer protection.
Centralized financial networks are fragile and require multiple layers of
oversight and regulation to ensure that the central actors do not abuse
their authority and power for their own profit. Unfortunately, the
centralized architecture of traditional financial systems concentrates
power, creating cozy relationships between industry insiders and regulators,
often leading to regulatory capture, lax oversight, corruption and, in the
end, financial crises. Bitcoin and other digital currencies based on the
block chain architecture are fundamentally different.
The security model of block chain currencies is decentralized. There is
no centre to the network, no central authority, no concentration of power
and no actor in whom complete trust must be vested. Instead, the core
security functions are put in the hands of the end users of the system. In
this architecture, security is an emergent property of the collaboration of
thousands of participants in the network and not the function of a single
In addition to the differences in architecture, there are also
fundamental differences in the nature of the payments themselves. Digital
currencies, like bitcoin, are much more like cash than bank accounts or
credit cards. The transfer of value in bitcoin is a ''push'' mechanism, not
a ''pull'' mechanism as is the case with credit cards, debit cards and most
other digital payments. A bitcoin payment is not an authorization to pull
from your account. Instead, it pushes the precise payment amount itself as a
value token directly to the named recipient. A single transaction does not
authorize any future transaction or expose the user's identity. The
transaction itself is unforgeable and not exchangeable. As a result, bitcoin
payments can be transmitted in the clear without encryption, over any
network, and can be stored on unsecured systems without fear of compromise.
Bitcoin's unique architecture and payments mechanism has important
implications for network access, innovation, privacy, individual empowerment,
consumer protection and regulation. If a bad actor has access to the bitcoin
network, they have no power over the network itself and do not compromise
trust in the network. This means that the bitcoin network can be open to any
participant without vetting, without authentication or identification, and
without prior authorization. Not only can the network be open to anyone, but
it can also be open to any software application — again, without prior
vetting or authorization. The ability to innovate without permission at the
edge of the bitcoin network is the same fundamental force that has driven
Internet innovation for 20 years at a frenetic pace, creating enormous value
for consumers, economic growth opportunities and jobs.
Bitcoin's decentralized nature affords consumer protection in the most
powerful and direct way, namely by allowing bitcoin users direct control
over the privacy of their financial transactions. Bitcoin does not force
users to surrender their identity with every transaction and put their trust
in a chain of supposedly vetted intermediaries who must be trusted to
control access to, securely store, and protect transaction data and
vulnerable account identifiers. Bitcoin transactions never expose vulnerable
account identifiers, and bitcoin users can protect the privacy of their
transactions without relying on or trusting any intermediaries.
Because in bitcoin trust is not vested in central actors, there is no
need for centralized regulation and oversight. When properly architected,
bitcoin financial services are not vulnerable to central points of failure
which would necessitate heavy-handed oversight and regulation. Instead, the
power lies with the end user, whose interests are most aligned with the
protection of their own funds. While individual bitcoin wallets can be
targeted and compromised if not properly secured, the bitcoin network does
not suffer from centralized systemic risks.
Contrary to popular misconception, bitcoin is not unregulated. Rather,
several aspects of the bitcoin network and financial system are regulated by
mathematical algorithm. The algorithmic regulation in bitcoin offers users
predictable, objective, measurable outcomes, such as a predictable rate of
currency issuance. These outcomes are not subject to the whims of
centralized institutions or committees, which are both corruptible and often
placed outside of democratic oversight. A bitcoin user can predict the
monetary supply 30 years from now instead of hanging on the nuanced
intonation of a single adjective by some high official of central banking
who can dramatically change an entire country's monetary velocity a week
Bitcoin's decentralized architecture does not easily conform to the
expectations and experiences of consumers or regulators because there has
never been a large-scale, secure, decentralized network before. The
combination of decentralization and security is the novelty at the heart of
bitcoin. In trying to understand consumer protection, oversight, audits and
regulation of bitcoin, there is a risk that many will try to apply familiar
models of the past to this new digital currency system. These models are all
centralized and designed to provide regulation and oversight of centralized
financial networks. Centralized solutions will be easier to understand and
seem familiar. However, they are both inefficient and unsuitable for this
new form of decentralized financial network.
I urge you to resist the temptation to apply centralized solutions to
this decentralized network. Centralizing bitcoin will weaken its security,
dull its innovative potential, remove its most disruptive yet also most
promising features, and disempower its users while empowering incumbents.
Consumer protection will not be achieved by removing bitcoin's built-in
privacy characteristics. Demanding user identifiers and adding access
control mechanisms on top of the bitcoin network and then trusting those
identifiers to a chain of intermediaries will only replicate the failures of
the past by introducing single points of failure into a network that has
none. We cannot protect consumers by removing their ability to control their
own privacy and then asking them to entrust it in the same intermediaries
who have failed them so many times before. Most failures in bitcoin security
are the result of misguided attempts at centralization and removing control
from the users. In this new decentralized financial network, we have the
opportunity to invent new decentralized security mechanisms based upon
innovations such as multi-signature escrow, smart contracts, hardware
wallets, decentralized audit, and algorithmic proof of reserves. These are
the new decentralized regulatory and security tools that are most
appropriate for a decentralized digital currency.
Thank you for the opportunity to address this committee.
The Chair: Thank you, Mr. Antonopoulos, for your opening remarks.
They have clearly resonated and stimulated a number of questions.
Before I turn it over to senators for questions, I just might make an
observation. In your remarks, you have told the committee that the
decentralized security model of block chain currencies is indeed secure, and
the bitcoin financial services are not vulnerable to central points of
failure, which would necessitate oversight and regulation. As a result, as I
hear you, you've come to the conclusion that this currency should be left
hands-off by the government and other regulatory bodies, and I quote, ''Centralizing
bitcoin will weaken its security.''
While listening closely to your comments, I couldn't help but observe
that you make absolutely no mention of illegal activity supporting a crypto-currency
like bitcoin. I was surprised that you make no mention of money laundering,
terrorist financing or other possible misuses because of the anonymous and
open nature of bitcoin.
I think you stated in your presentation that the bitcoin network can be
open to any participant without vetting, without authentication or
identification, and without prior authorization.
I suspect that the misuse or potential misuse of bitcoin for nefarious
purposes is very much a concern to Canadians as well as to this committee.
Would you have any comments on that? Perhaps some of the senators will want
to pick up on that in their questions as well.
Mr. Antonopoulos: Absolutely. I believe that there is a great
misconception in the idea that bitcoin use is anonymous or that the network
itself is anonymous. On the contrary, the central public ledger allows any
participant to observe all transactions that occur on the network. Those
transactions are not always tied to a specific identity, but with the use of
traditional law enforcement mechanisms, when an identity is attached to a
specific transaction, that transaction can be followed throughout the
network, and therefore the network does not afford more anonymity.
In fact, it is easier to implement strong transparency and accountability
features on the network than it is to achieve strong anonymity on the
Furthermore, I think bitcoin is not a very convenient network for such
uses. The vast majority of such activities really occur with cash, in fact
with the U.S. dollar. I don't see bitcoin as the primary vehicle for illicit
activities of that type. I see the tremendous potential for the use of
bitcoin among the more than 6 billion people in the world who have very
limited access to international currencies, international credit markets and
international trade. I think that use far outweighs the tiny minority that
might put some currencies to illicit use.
The Chair: Thank you for those comments. With that, I'm going to
start with my list.
Senator Massicotte: I think Senator Tkachuk has the same question.
Try to explain how it all works. Can we try that?
The Chair: When it's his turn, we will turn it over to him.
Senator Black: Thank you very much, Mr. Antonopoulos, for being
here. I'm finding very real interest in what you have to say.
Let me outline first of all what I'm hoping to come to understand from
you. I'm interested in learning what is needed to ensure that this
innovation can continue to develop. That's my premise, right or wrong.
Building on the chairman's initial comments, I have a question or two for
When CAVIRTEX testified before this committee, they stated they would
like to see bitcoin regulations put in place as soon as possible to give
clarity on how bitcoin is classified. They believe, and they told this
committee, that this would allow bitcoin to thrive in Canada. In your
remarks you've stated that bitcoin should not be regulated centrally because
it will stifle innovation. Considering that other groups have echoed the
statements of CAVIRTEX, help me with the disconnect that I'm hearing between
the evidence of CAVIRTEX and what you have said today.
Mr. Antonopoulos: Absolutely. I believe that the best way to help
bitcoin is to ensure that there is clarity in the treatment of bitcoin and
that bitcoin is not essentially forced into contorting itself into
regulatory structures that are designed by banks for banks or with
traditional models of finance in mind, which are primarily centralized, and
to recognize bitcoin as programmable money with capabilities such as digital
multi-signature escrow and with many more flexible ways of responding to the
needs for consumer protection.
For example, in the traditional banking environment, unless you hold
cash, every account that you have as a consumer is a custodial account. That
means that the account funds are held in trust by a bank, and what you have
in return is essentially a promissory note that that money will still be
there tomorrow morning. The bank controls the funds entirely.
Bitcoin allows a much more varied range of control between a consumer and
the financial services institution that they may use, from completely
decentralized control, where the consumer or end user is the only one with
full control over the money, to complete custodial accounts where a
financial services institution has full access to the keys and the consumer
In between, there are also models that are hybrid where the bank may have
a signatory role but not be able to change the direction of the funds,
simply to approve transactions. Within this very broad range of
possibilities, obviously some aspects of that need to be regulated. What I
mean by that is if you simulate a traditional financial environment with a
custodial account where you take full control over a user's funds, then
those funds are now outside of the bitcoin security model. They are no
longer protected by the user's control of the keys. They're no longer
protected by the block chain. They are now in a grey area where they're not
covered by regulatory requirements for capital adequacy, audits, security
requirements and control, et cetera, but they're also not covered by a
bitcoin security model.
We've seen that whenever that has happened it has resulted in disaster.
Almost all of the exchanges that have been attacked in bitcoin had a full
custodial model like that. However, that is not the only model that exists.
There are digital bitcoin wallets where the user has complete control. There
are wallets where the user has complete control, but transactions cannot
happen unless an additional signature is placed by an institution that acts
essentially as a risk manager to ensure that even if the user's systems are
compromised the money can't be stolen: a hybrid model.
If you lump all of those together under a single, unifying regulation,
assuming it's all just like a bank, then you miss out on opportunities to
create better solutions for this new, programmable money.
I believe that certain models of bitcoin use must be regulated. If
control over the user's funds has been centralized, then that institution
puts consumers at risk. But to lump a decentralized model where a user still
has full control over their funds and an institution can't steal their money
under that same regulation not only is misguided but doesn't leave any room
for that technology to develop further.
Senator Black: Thank you very much for that. So what would you
suggest to this committee in terms of regulation, if any?
Mr. Antonopoulos: I believe we're still at the very early stages
of this technology. Not only is bitcoin new, but bitcoin is already evolving.
For example, the capability to do multi-signature transactions, where
there can be up to 20 different signatories on a single transaction and a
transaction can be controlled by any mixture of signatures, that technology
was introduced in 2012, four years after the introduction of bitcoin. It
came into full fruition or full availability in 2013. So already bitcoin is
developing new and exciting programmable capabilities for user security.
I think this technology needs time to breathe. It needs time to show the
full potential of what is possible with decentralized, programmable money.
Until that time, I think opening up those possibilities by making clear
distinctions, where the technology allows it, between centralized and
decentralized modes of operation, for example, understanding those nuances,
can create niches where new players can come into the financial services
market and introduce innovation, competition and, quite honestly, disruption
into the banking industry by trying out new models for consumer protection.
They are, in my opinion, superior to the ones we have today.
Senator Black: So your answer is what, in terms of what this
committee should do, if anything?
Mr. Antonopoulos: Wait until the technology is better understood
by all of us.
Also, understand that there are nuances in this technology that require
very careful treatment because a blanket treatment as if this is just a
currency, which it is not — it is a network for money — as if there is only
one application of the bitcoin currency, which there is not — there are many
applications based on this model — would stifle this technology in its early
Senator Campbell: Thank you so much for coming today.
I remember when I got an IBM Selectric that had the x-backspace so I
could correct letters, and I thought, ''Nothing will ever be cooler than
this; it's impossible.'' I'm 67. That's my generation.
You say it needs some breathing space. Would it be fair to say that the
younger generation gets this more so than my generation?
Mr. Antonopoulos: That's the case with any new technology.
Senator Campbell: Do you think it's fair to say, for instance — I
would doubt very much that I will get into bitcoin. I don't really
understand it even still, and we're on our eleventh meeting. Senator
But when I talk to younger people about this committee, they totally get
it. They don't have any questions at all. They say, ''This is where we're
going, and this is how we're going to get there.'' I've been told to keep my
old nose out of it. I think you explained it. How much time does it take to
breathe for this? How long do you think that would be? How rapidly will this
come upon us?
Mr. Antonopoulos: I would estimate that bitcoin today is
approximately in the same position that the Internet was in 1992. In 1992,
email required command line UNIX skills typed into a mainframe, and it was
very difficult. Approximately 10 years after that, it had already reached
mainstream adoption among especially younger people. Almost exactly 20 years
after that, my mother got her first iPad and was able to send her first
It took a while before the technology went from something extremely
esoteric that was only the purview of someone working in a computer-science
department until my mother could do it with a swipe of her finger, and she's
a self- acknowledged technophobe.
So it may take some time. But I can tell you for sure that this one will
be about three times faster, and that's because we're not deploying physical
infrastructure and we already have the Internet as a medium on which we can
spread this technology.
I believe that within eight years we will see mainstream applications
that will be much easier to use and secure and that will allow consumers to
use bitcoin in a way that feels very comfortable. At the moment, we are not
Senator Campbell: Okay. One more question.
The question I have is that if you don't need any centralized oversight,
who provides — you say, ''Well, the front-end user and the end user control
the whole thing.'' If there is nobody finding out who is the front-end user,
how can we be so sure that we won't see ISIS or one of those other whack-job
crews use this as a method of transferring money around the world?
Mr. Antonopoulos: I firmly believe that the possibility for
positive use of this technology far outweighs the very small possibility for
negative use of this technology. The truth is that ISIS is probably using
pallets of money they stole from allies during their reign of terror and not
It's really a matter of understanding that to limit a technology that has
the possibility of bringing economic inclusion to billions of people who do
not have it today — in the same way that cell phone technology allowed
entire nations to leapfrog the land line and land in a technology realm and
achieve communications that would be unthinkable — bitcoin can do the same
for banking and finance. It can empower billions of people around the world
in areas such as remittances, international finance and credit, accessing
liquidity and loans, and things like that.
As with any technology, this technology will reflect society, and there
will be a tiny minority that will try to use it for evil. But I have full
faith that law enforcement capabilities properly exercised can follow funds
on bitcoin just as they can in the normal financial networks — probably more
so than they can in traditional financial networks.
Furthermore, I think bitcoin is the most open and transparent of crypto-currencies.
There are already 500 others, and I believe that if bitcoin is not given the
opportunity to work in a way that empowers people, eventually criminals will
move to far stealthier and far less open currencies and use those instead.
Senator Campbell: Thank you for coming today. I appreciate it very
Senator Greene: Thank you very much for coming. This is without
question the most interesting topic we've looked at since I've been a member
of the committee. I'm just amazed.
Last night as I was reading your paper, the idea that occurred to me —
and I want you to comment on it — is that bitcoin and related currencies are
not hackable because there is nothing to hack; is that a true statement? If
it is, could you explain that in very simple terms, because I imagine there
are a lot of people watching this.
Mr. Antonopoulos: Individual bitcoin wallets — my wallet — can be
hacked, and we see examples of that. The system as a whole cannot be hacked.
I say that with confidence because, over the last five years, especially
recently in the last year and a half with value transferred over that
network exceeding US$5 billion, there has been no shortage of people trying
to hack bitcoin. If anything, we have seen that bitcoin has changed the very
dynamics of cybercrime and hacking; it has escalated the attacks and created
a target for hackers that is extremely fluid that resides on people's
computers, and they have tried to take advantage of that.
I know that bitcoin can't be hacked simply because many people have been
trying non-stop for the past five years and can't hack it. So there is a big
difference between the system as a whole, which is a dynamic system that
responds to hacking attacks, and individual wallets.
I think you see a very similar development timeline as with the Internet.
I remember a time when groups of hackers could take down Yahoo for a day, as
well as Microsoft and Google, and they don't do that anymore, and it's not
because they stopped trying. It's because a dynamic system that is
constantly exposed to threatening stimuli will develop resistance and will
become more resistant to these types of attacks. That's a concept often
called ''anti-fragile''; it becomes dynamically stable and resistant to
Bitcoin is not static; it continuously evolves and continuously deals
with attacks better and better over time.
Senator Greene: You mentioned in answer to the previous questioner
that there are roughly 500 other crypto-currencies. What is the size of
bitcoin in relation to those? Are they major competitors or are they
Mr. Antonopoulos: I would say they are copycats, for the most
part. My personal opinion is that the allocation of crypto-currencies in
terms of market size, adoption, users, et cetera, follows a long-tail or
power-law curve, where the vast majority is concentrated in maybe a handful
of currencies and then you have a tail that stretches out to encompass
thousands of smaller currencies.
The dynamic of being able to create currencies at whim creates an
environment where there will be thousands — possibly tens of thousands — of
currencies in the future. Only a handful will have economic viability and
market value, but that does not change the nature of it. In my opinion,
people will create currencies the way they create Internet memes. In many
cases, they will be Internet memes. We have seen that happen in currencies.
What is happening here is a laboratory of evolution and innovation, where
new ideas are tested, and some of the best results of that are often
catastrophic failure on a small scale that informs future designs for
Senator Greene: It's amazing.
Do you foresee a time when, in the interests of economic development, or
what have you, a nation state decides to forego its own currency and adopts
Mr. Antonopoulos: That's a difficult question because I think the
very nature of currency is changing. I think the economy, if you like, or
organization that is adopting the currency is the Internet, and that's a
transnational entity. I think that has even more important implications for
the future than national currencies. Bitcoin is already bigger than some
national currencies and in the future may end up being more important for
economic activity than dozens of smaller national currencies.
I do foresee that in the future, national central banks may utilize block
chain technology to underpin national digital currency.
Senator Greene: Thank you.
Senator Massicotte: Thank you for being with us. It's very
interesting and very useful. Let me follow up on the question from our
Your presentation makes a reference that you discourage us from even
recommending some form of identification. Your argument is that it's always
visible. You are right; the chain is visible. However, what you do not see
in the chain is who is behind the chain. That is why, I presume, people of
illegal objectives and means are prepared to use it, as they are apparently
using this mechanism to transfer money and launder money.
I gather your argument is I recognize that that is a negative, but please
don't hesitate with that issue; don't put measures in place to restrict that
flow because the usefulness of those measures to identify who is behind the
transfers is lesser than the use to our society for letting this thing
develop. Is that accurate? That is, the chain is visible, but not the
identity of the person, which is what the chairman was asking.
Mr. Antonopoulos: I am recognizing two aspects. One is that
attempts to impose identity on bitcoin will, in my opinion, be ineffective
because there will always be channels in which non-identifiable transactions
can be introduced, either in bitcoin or in other currencies, while
simultaneously removing one of the main advantages.
Senator, today I received three automated phone calls from Visa fraud
prevention because I have used my card in Canada. They have been calling me
all day. This happens to me every time I travel. It's a symptom of the fact
that, by releasing an identifier that allows others to pull from my account
and that ties every transaction I do to every activity I do, I'm not only
giving up my privacy but also endangering my personal security every time I
use a credit card. This system is non-viable. I watch every few weeks on the
news that yet another group has had 50 million consumer credit cards and
identities lost. For the average consumer, that means months of identity
protection and risk. These are the intermediaries who handle our identities.
Over the last two decades we have seen that protecting information security
systems in such a way that we can prevent these types of thefts is not
possible. The mistake is tying identity to every transaction and creating
systems that can continuously draw from our accounts.
Bitcoin is fundamentally different. To break that in order to tie an
identity that anyone can easily bypass if they have ill intent would not
result in protecting us more, but it would result in harming consumers.
Senator Massicotte: The conclusion is that while you acknowledge
that this form of system could encourage money laundering, you are also
arguing please don't do anything about it because the benefits to society
from this form of transfer are more important. Is that your argument in
principle? I gather that is what you are saying.
Mr. Antonopoulos: My argument is that the invention of block chain
technologies allows any of these systems to be used for ill intent without
identity, and nothing can be done to stop someone from abusing it.
Senator Massicotte: Or even try to stop it.
Mr. Antonopoulos: I think that would harm the vast majority of
people who do well with it.
Senator Massicotte: We are older than you are. I look at central
banks because we are the Banking Committee, and they come across with new
theories every 20 or 30 years about money supply, or money growth, or
controlling inflation or controlling currency. We always learn 30 or 40
years later, ''Sorry; we got it wrong.'' Shit happens, in other words.
I look at your algorithm. You say, ''We are going to predict the
necessary growth of this currency'' — it's a form of transfer — ''and we
have it right.'' However, I highly suspect 20 or 30 years from now we will
say that you did not get it right. When you predict the future, what are the
one or two things you can get wrong? That is, where are the two weaknesses
where you say, ''I could have gotten it wrong and here is where I may have
gotten it wrong?''
Mr. Antonopoulos: It is useful to understand that bitcoin's
monetary policy is just one recipe that is possible. Bitcoin and other
currencies allow us to implement monetary recipes at will and then fix them
in place for each currency. If bitcoin's monetary recipe is wrong, people
will move to another currency that has the same characteristics of
decentralized organization, but with a different monetary recipe. It is
simply one of the possible choices.
I don't know if it is right or wrong, but I do know what it will be in 30
years exactly for bitcoin. I can tell you to the millionth decimal point
exactly how many currency units will exist 140 years from now in bitcoin.
What it provides, whether or not you like the recipe and whether or not you
agree with it, is certainty and predictability, and it allows people to
adjust their expectations for that. Whether that's the right monetary policy
or not, with this new model you can build your own currency which has a
different monetary policy. If it is better, it gets to win. It's an open
Senator Massicotte: The supply is defined, given the algorithmic
formula. People like our chairman have bought this unit, so maybe the supply
is limited. Will it be equal to the demand growth? Who knows?
Mr. Antonopoulos: Nobody knows.
Senator Massicotte: Therefore, the price of that currency may
fluctuate immensely if you have it wrong because obviously the purpose of
the algorithm is to project that future growth as reasonably as they can.
Maybe the supply is defined but not the price. If you have high fluctuation
of value, that will discourage its use.
Mr. Antonopoulos: Absolutely. At the moment, I think volatility is
a reflection of low liquidity in bitcoin. Bitcoin has a very specific
recipe, namely to simulate the supply curve of a precious metal like gold.
That is a specific monetary theory.
If there is a different monetary theory, you can build a different
currency using block chain technology. You can even build a block chain
technology currency where monetary supply is defined by a committee of 12
central bankers and then invite users to adopt that. It would still be more
transparent than our current system of money.
Senator Wells: I am pleased to be here today filling in for
someone. We ran into each other earlier today, chair, and you said it was
going to be an exciting committee meeting, and it is.
Mr. Antonopoulos, thank you for coming here and thank you for your
answers so far.
Who are bitcoin's biggest detractors, and why are they enemies of
Mr. Antonopoulos: I'm not sure who bitcoin's biggest detractors
are. I can tell you that I, along with every other passionate advocate I
know, started off as a detractor. My initial response to first identifying
bitcoin was, ''This is nerd money; it can't possibly work.'' In fact, when
Satoshi Nakamoto invented bitcoin and announced it on the crypto mailing
list, everyone around him responded in pretty much the same way.
The circle of advocates, which is now numbering in the millions, consists
entirely of people who started out as very strong skeptics. The difference
is the first time I saw it that was my reaction. The second time I read the
paper and understood this was not a currency, it was a decentralized network
model for financial security and trust, which allows currency but also
allows many other things. That literally blew my mind. Then I understood
this was much bigger. We all started out as skeptics.
I don't know if all skeptics become advocates over time, but I see that
most people who look at bitcoin carefully very quickly understand that
there's a lot more to this than meets the eye.
Senator Wells: What would be the biggest threat to bitcoin's
growth? Would it be having people overcome the fear of their unknowns? Would
it be the security aspect, the level of technology available or the
individual nodes that might not have the security that the whole system has?
Mr. Antonopoulos: There are some significant security problems
related to the ownership and control of bitcoin keys and bitcoin wallets for
the end user.
The simple truth is we've been doing information security for a handful
of decades. As an industry, that industry is not effective at doing it,
whether that's trying to protect credit numbers or bitcoin for the end user.
The nice thing about bitcoin is that risk is compartmentalized, so there is
no systemic risk.
Over time I think we're going to see the development of more secure
mechanisms like hardware wallets, such as the ones beginning to appear in
the market today. For every problem I see in bitcoin, as an entrepreneur I
simultaneously see a tremendous opportunity.
If you go back and look at the history of disruptive technologies like
this, in 1994 there were dozens and dozens of articles about how the
Internet would fail because no one would ever be able to find anything on
the Internet. Sergey Brin and Larry Page decided that was an opportunity,
not a problem. With bitcoin, each one of these problems also is possibly a
very innovative new financial industry that can offer solutions.
Senator Wells: Of the millions of users of bitcoin currently, who
would constitute the biggest user group? Are they international financial
transactions? Who is the biggest user now, the one with the highest
Mr. Antonopoulos: Honestly, I think there are a few statistical
surveys that provide insight into that. I'm not sure about the exact
numbers. The most common use for bitcoin is charitable giving, donations and
I would say probably the demographic at the moment is very similar to the
early Internet, which is a very narrow demographic of technology
professionals. There are a lot of nerds in this space. I can say that for
sure. It just follows the same path as any other technology. It's becoming
more and more broadly appealing to a broader demographic over time.
For me, the most interesting thing is not what bitcoin can do for Western
developed countries, because we have fairly sophisticated banking systems. I
am fascinated by the idea of being able to deploy bitcoin on a Nokia feature
phone in Kenya and Lagos, Nigeria, and bringing online to the global economy
people who have never had access to financial services with international
credit, and who could now be connected to everyone else in the world on an
equal footing. That is exciting to me, and that's where the greatest need
lies that bitcoin can fulfill.
Senator Ringuette: This is most impressive. You started out by
saying you'd spent 20 years working on networks and data centres for
financial services companies. I think they must be in dire need to hire you
With all the knowledge that you have gathered about crypto-currency, what
would be your guesstimate to develop and create a similar crypto-currency?
Mr. Antonopoulos: I'm not sure I understand the question.
Senator Ringuette: As you said, there are 500 different currencies
on the networks. What would be the cost to develop and create a similar
crypto-currency like bitcoin?
Mr. Antonopoulos: Every day somebody decides that bitcoin isn't
the correct answer and they have a better one. They go ahead and choose to
try to build a better crypto-currency. The thing that block chain technology
has done is it has taken the very natural inclination of people to create
currency as a form of language, as a form of expression of value. This
exists in every society, whether it's from prehistoric times with beads and
feathers to modern times with company money, company scrip and all the forms
of currency that have existed before, federal, nationalized, monopoly money.
That possibility of not only creating a currency but that currency being
instantly, from its creation, global, secure, fast, predictable and
transparent, that capability means that now a 10-year-old can create a
currency and that currency can be as secure as the currency created by a
monarch a few centuries ago.
Just like the Internet brought desktop publishing and communications into
the hands of individuals and enabled the capability that previously was the
purview only of those who had football-field-sized printing presses, the
block chain technology has democratized access to currency creation. As a
result, anyone with the impulse to create currency, for serious reasons to
reasons that are completely trivial, can now do so. That currency is
instantly global, secure and unforgeable.
Senator Ringuette: And without cost.
Mr. Antonopoulos: And without cost. In fact, you can go onto a
website and create the Ringuette coin today for a fifth of a tenth of a
bitcoin, for small amounts in any case, and very soon that will be free.
I anticipate that you will see coins created by children, performers,
entertainers, football teams, and most of these will only have entertainment
effect or entertainment value. Some of them will surprise us and cross into
the realm of economic value. It changes the fundamental relationship between
individuals and the use of currency as a form of expression.
Senator Ringuette: You said individual bitcoin wallets can be
targeted and compromised if not properly secured. How can one properly
secure a bitcoin wallet?
Mr. Antonopoulos: With great difficulty right now, and great
technical skill. This is one of the issues that need to be addressed over
the next many years in order to make bitcoin more accessible to mainstream
users. Right now it's difficult to do so because our computer systems are
not designed to secure money that has taken pure digital form and resides
on, say, your iPhone or your desktop computer.
For experts and specialists there are new devices that come out, for
example wallets that are completely embedded in hardware, small devices that
you plug into your computer where all of the bitcoin keys are held only on
that device. I actually print out my bitcoin keys on paper and I put them in
a fireproof safe and store a second copy in a bank safe deposit box, which
is ironic because I'm securing the bitcoin by putting it in the vault of a
bank. But making it physical actually allows me to impart the greatest form
of security that I know how to use, because physical security is something
that we're familiar with.
Information security is actually being accelerated because of bitcoin,
and a lot of innovation is happening in that space, which is very exciting.
Senator Ringuette: You indicated that a person could acquire a
loan in bitcoin. How would one go about that?
Mr. Antonopoulos: There are already organizations that are
implementing a concept called peer-to-peer lending, which exists in the
traditional currencies. For example, in the traditional currencies there are
companies like lendingclub.com where I can go out and make a loan to a
fellow American and they will end up paying a lower interest rate than a
credit card, and I'll get an interest rate that's higher than I would get
with a certificate of deposit. If I diversify my loans enough and only
invest a small amount in each loan, I can suffer a pretty low default rate.
That model can now be taken global, and I could lend money with bitcoin —
there are companies already doing this — to someone anywhere in the world,
and, in fact, in that case, I would invest perhaps in two or three thousand
different loans, so that default on one loan wouldn't affect my entire
amount, and diversify my risk that way.
This has tremendous implications for worldwide credit, because it not
only allows people in the developing world to source credit, but it also
allows people in the developed world to invest their money directly with the
borrowers, without intermediaries, at much lower cost, and it's already
Senator Ringuette: But you have an interim intermediary. You have
this organization that kind of directs what you are prepared to loan and the
people that want to acquire a loan.
Mr. Antonopoulos: Today we do, yes, indeed, but with bitcoin, this
is one of the tremendous things that's happening, which is that many of the
traditional financial services can now be redesigned and re-envisioned in a
completely decentralized fashion without intermediaries. This concept of
disintermediation, or removing intermediaries and connecting directly buyers
to sellers, lenders to creditors and consumers to merchants, without
intermediaries, is the magical power of bitcoin. That's what this invention
has allowed us to do, without having to establish trust first.
So with bitcoin we can have a completely decentralized market for credit
and lending that is simultaneously global, near instantaneous and allows
access to a vast pool of credit, and that's a very exciting prospect.
Senator Ringuette: If Canada would move forward and do some
regulation, as some witnesses have asked of us, and the G7 countries did not
follow with similar regulation, what would be the pros and cons of such a
Mr. Antonopoulos: That would be interesting because already we see
tremendous regulatory fragmentation. We have a regulator in New York State
that has taken initiative to do regulation based on New York state law,
regulation that looks very similar to traditional banking regulation and is
not very well-suited for bitcoin.
Simultaneously, there will be other forms of regulation. So in the United
States, we're likely to end up with a patchwork of state, local and federal
regulation, and I think you're going to see similar attempts in many
Bitcoin technology is such that it can operate across borders very
effectively, and, therefore, bitcoin companies can migrate to the area of
least friction and can create the jobs, innovation and growth in the places
where regulation is best informed about the nuances and particular needs of
So I think Canada and other countries that are looking at this regulation
very carefully, rather than rushing into it, have an opportunity to create
an environment that is friendly to those companies and attract one of the
industries that, quite frankly, is creating thousands of jobs today, which
is not to be said for too many other industries.
Senator Meredith: Thank you so much for your presentation. I read
your notes last night, and this is a segue into what my colleague just
raised with respect to regulations. Our committees here in the Senate are
looking to put forward recommendations in a report to government that
hopefully will become law to protect Canadians.
You talked about individuals being hacked and companies that you cited
earlier that have spent millions of dollars on their security architecture
to protect the data that has been provided by their consumers. We see how
vulnerable they are, and this data has been lost. Major banks have come and
indicated that they have been hacked months later, to the surprise of their
consumers whose credit cards and data are out there.
Now you're advocating a decentralized system, when the traditional
banking system is predicated on all the security measures put in place to
protect consumers. We're about protecting Canadians.
To bring it back to how we would do that, going forward with bitcoin and
what you're proposing, I understand the rationale of access, especially when
it comes to, for example, Africa and the outlying areas. We see the
revolution of cellphones and how that has changed the dynamics of
communication as well as transactions.
Talk to us about the security aspect of how we would go forth with
respect to protecting Canadians who are engaged and who will become engaged
in more transactions.
Mr. Antonopoulos: One of the big failures of regulation in the
traditional environment is that with centralized identifiers and centralized
regulation comes centralization of risk. So when an organization such as
Home Depot or Target is hacked, and they lose 60 million consumer
identities, the reason that represents such an enormous impact is because
they were storing 60 million user identities in the first place. Instead, if
each one of those 60 million consumers had to be individually attacked,
targeted and hacked successfully, the possibility of that happening is much,
much lower. So the advantage of a decentralized environment is that there is
no central repository, motherlode, cache, vault where everyone's identity is
stored and, therefore, everyone's identity can be attacked at the same time.
Bitcoin proposes a different model where the risk and the control are
pushed out and put in the hands of the users, and the result of that is that
it makes a system that is much more resilient to systemic risk. However,
that means that the users themselves have enormous power, and with that,
they have enormous responsibility. That control exposes them to
Senator Meredith: How do we mitigate that risk, though?
Mr. Antonopoulos: That risk is already being mitigated by
innovations. On the one hand, you have this increased exposure of the
individual one by one, but on the other hand, we have programmable money. So
the fact that it is programmable money allows us to invent completely new
models for security, whether those are specialized devices that control keys
and never expose them to an Internet environment, whether that is
multi-signature transactions where, in order to release funds, a number of
signatures are required to release those funds. Those signatures could
belong, perhaps, to two different devices that the user carries, so they
simultaneously need to authorize a transaction from their laptop and their
mobile phone, which gives them a greater degree of security. You could have
secondary or tertiary controls stored on paper or on a device that's kept
off-line, in a vault, at home, in a fireproof safe, whatever. Those are the
basic things we're doing right now.
But based on this technology, we're already seeing companies that are
providing services to consumers where they will look at every transaction a
consumer is making and provide a third signature to authorize that
transaction based on a risk assessment. In that case, that company has no
custodial control over the funds. They can't take the user's funds. All they
can do is sign or not sign that transaction. They're providing a risk check
and just that.
These are very interesting models that we have never explored before
because the user did not have enough control and the network was not open
enough to allow this type of experimentation and access. The technology
underlying it was not flexible enough.
So I have great faith. Already, just in the last two years, as this
technology has gone mainstream, the amount of innovation around that exact
problem has accelerated tremendously, and we're gradually, I think,
beginning to win in terms of protecting end-user wallets.
In this environment, specifically, requiring the users to attach identity
to every transaction and then put all of those in a central repository, just
like the regulations in New York have demanded, to me is folly, because it
takes away the one opportunity we have to think of a different way of doing
this and exposes us again to the same systemic risk of centralized points of
failure and risk that we have with credit cards. So I'm hoping that the
market is allowed to develop these solutions.
Senator Meredith: Going forward, my colleague Senator Black raised
this with respect to breathing time, and you indicated this as well, but
what would be a suitable time frame for us to be able to look at? Obviously
this is evolving, this is developing. However, we believe that some of sort
of regulations have to be put in place to govern, similar to what we've done
now with the Internet in terms of privacy, requests for information and so
With respect to the breathing time, if we were to enact some sort of
legislation, give us your opinion as to what that would look like, to govern
bitcoin and its transactions.
Mr. Antonopoulos: I think that if we look at the experience with
the Internet, the opportunity for the Internet to develop its own models for
self-regulation was extremely effective, because it delivered a lot of good
to a lot of people. In fact, ironically, when the U.S. Senate finally came
around to regulating spam it was the same year that technology solved the
problem. So in some cases waiting is the better option.
I don't think there's a major problem with consumer access to bitcoin at
the moment in terms of the risk that it poses to consumers. However, there
are particular areas where I believe your committee could offer clarity. The
first one is making a clear distinction between centralized custodial
accounts and decentralized models of bitcoin operation, and not lumping them
together. Centralized custodial accounts are dangerous to consumers. They
expose consumers to the exact same risk of a centralized financial
institution, only in this particular case there is zero oversight or control
over these institutions because they operate outside of the banking
For example, when CAVIRTEX came here and asked for a regulation in that
environment, it is a very sensible idea because CAVIRTEX has complete
control of the user's keys and operates in the traditional centralized
custodial manner. However, I think leaving opportunities for the development
of decentralized solutions, and recognizing that those are neither subject
to the same risks for consumers nor do they need or can use effectively the
same types of regulation as custodial accounts, would open up a lot of
possibility for innovation in that space.
I think it's also important to carve out exceptions. There are exceptions
already in existing law, in terms of personal use of small amounts of
exchanges. For example, if I exchange a small amount of U.S. dollars for
Canadian dollars on the street corner, I'm not going to be arrested for
operating without a money transmitting licence.
I think it's important to recognize that on a small scale and for
personal use, there should be clarity in the law that makes it clear that
you don't require licences to operate and that personal use as a consumer is
not subject to banking level regulation, because that would be very useful
in allowing for the development of this technology.
Senator Meredith: One final question, chair. You talked about the
bad actors and the small percentage of them. What systems do you currently
have in place to deal with individuals who would abuse the system?
Mr. Antonopoulos: Traditional law enforcement has been
tremendously successful in being able to track and stop such activities on
the network again and again. So far I haven't heard of any particular need
for changing the way the network operates, and in fact such a request would
be met with no change because this is a global network that isn't under the
control of a single individual. I don't control bitcoin any more than
anybody else controls bitcoin.
So the network itself provides a level of transparency that law
enforcement can use.
Senator Hervieux-Payette: With your permission, I am going to put
my questions in French, because no one has spoken French yet.
Are there countries now that recognize the bitcoin and have created a
framework for it?
Mr. Antonopoulos: I believe that there are several countries in
which bitcoin use has been recognized in many different ways at different
levels of legislative or judicial process in terms of recognizing in fact
that bitcoin is money and that it is subject to the same rules and
regulations around taxation and operation. But with that it also carries
certain liberties, such as freedom of association and freedom of expression.
So in many countries, bitcoin fits comfortably within the existing system
for currencies. However, I don't know that that has required specific
legislation or that any country has legislated specifically for bitcoin.
Senator Hervieux-Payette: I have a very brief question that
follows up on a question asked earlier. If Senator Ringuette launched a
Ringuette bitcoin this week, and if our chair had had his own bitcoin for a
few months, what would be the value of one as compared to the other?
Mr. Antonopoulos: The various currencies that exist out there are
related to each other based on a free-floating market rate, and that market
rate is determined by trade between individuals on exchanges where those
currencies can be sold and bought for each other. This is exactly the same
mechanism with which the exchange rate between the Canadian dollar and the
U.S. dollar is determined or between any currencies in the modern world, so
all of these currencies have the free-floating market value.
I would argue that if there is very low liquidity in that market, it will
be very difficult to establish a price that is representative of the value
of that currency. Price discovery will be difficult and, in fact, will lead
to very large volatility. As bitcoin and other currencies get larger, the
volatility decreases. In fact, the volatility of bitcoin today is not at all
dissimilar from the volatility of oil during the first decade of the
discovery that oil could be used as a substitute fuel instead of the whale
oil that was used at the time. We see this with new technologies where, as
the market develops, it starts off with tremendous volatility but over time,
as the amounts of volume and liquidity in the market increase, the
volatility is reduced until these currencies become extremely stable.
For a global currency, a $5-billion valuation is tiny, and so I would
expect that bitcoin will remain volatile for many years to come.
Senator Hervieux-Payette: So Senator Ringuette can reflect on the
$5 billion she has to invest.
You have been discussing the security issues that surround the use of the
bitcoin. We are parliamentarians and we work in a Parliament. After this
committee I will go to sit on the Committee on National Finance.
My question is about government control. If you do all of your
transactions using bitcoins, and if its value changes constantly, how can a
government exercise financial control?
Mr. Antonopoulos: The citizens of that government would exercise
direct control over the currency through their own purchasing decisions, and
through ownership control over their own units of currency. In many cases,
as I mentioned before, bitcoin is not unregulated. It is regulated both by
mathematics and by dynamic markets that exist among its participants and
users. Both the price of bitcoin, its value in commercial transactions, and
the use to which it is put are managed directly by the end users, and those
end users arguably are the same constituents. So if the constituents can
apply direct control over the currency, they will do so.
Senator Hervieux-Payette: If we look at its value in the month of
January, and we are preparing our report that will be submitted in April,
what value should we use, for conversion purposes, in order to be able to
report to the tax authorities? People have to fill out an income tax report
and establish a value. The fluctuations can be very large, whereas the
quantities are not enormous. There are very few people who have enormous
annual incomes. The average Canadian makes about $45,000 a year.
What will be the value of the income to be reported on an average
Canadian's income tax form, one who earns $45,000 a year, for the months of
January, February and March? How will that person be able to monitor his
Mr. Antonopoulos: That is a very interesting question and one area
where regulatory clarity would be extremely useful. I earn the vast majority
of my income directly in bitcoin. Since October of last year, I have earned
very little in terms of national currencies. I get paid in bitcoin, and I
pay many of my expenses directly in bitcoin.
For the purposes of taxation, I treat the bitcoin as earnings in a
foreign currency, just as if I were doing contract work for a European
company and being paid in euros. I will assess the market value of the
transaction when I earn the income at that current market price, and then I
will render taxes to the tax authority in the national currency. After all,
the primary power of the tax authority is to force the users to pay in the
currency of their choice.
What becomes difficult is that, in the case of use of currency, the
classification in the tax code depends on the use I have. For example, if I
use my brokerage accounts to purchase euros for investment purposes and I
sell those euros two months later and realize a gain, I will be subject to
capital gains tax upon that gain. However, if I visit Paris and I use euros
to pay for a ticket to the local Paris zoo, and the price of the value of
the euro changes between the moment I purchase that amount with my own
currency and the moment I paid for the ticket, I'm not assessed capital
gains. It is considered a currency use, and therefore it is treated
The tax code is flexible enough to allow me to declare the appropriate
use for the appropriate tax classification, depending on how I've used it.
At the moment in the United States, at least, there has been a ruling
that says that bitcoin operates as a commodity with capital gains taxation,
which is, in my opinion, the wrong answer. However, if bitcoin had been
classified purely as a currency, that would have been the wrong answer, too.
In my opinion, the correct answer is that it depends on how it is used. If
it is used for long-term investment, then it is subject to capital gains and
losses, obviously. If it is used for consumer spending, then it operates as
currency and means of exchange.
The tax system allows me to declare upon honour how I've used the
currency and then imposes penalties if I have made that declaration
incorrectly. That's how it works with every other currency.
This is an area where clarity would be extremely useful, because it would
allow us to use currency such as bitcoin in the same way we use currencies
from all over the world.
Senator Tkachuk: Thank you for your testimony here today. It has
been an interesting afternoon.
Are the other virtual currencies based on an algorithm as well, and is it
the same one you used for bitcoin?
Mr. Antonopoulos: There are several algorithms within bitcoin.
There is a central invention, which is the block chain, and the security
model that uses consensus through proof of work, which is a technology that
allows a network to arrive at a secure picture of what the current ledger
is, based on competition. That central technological innovation is used in
the vast majority of currencies. I'll call that the block chain invention.
However, there are other algorithms in bitcoin, such as the one that
determines how often and how much of the currency is issued. Other
currencies have taken different perspectives, so they use a different
monetary policy recipe.
We've seen a very broad range of those choices, from currencies that are
far more inflationary in nature with bigger supply of currency, even to ones
that implement a demurrage interest rate — meaning a negative interest rate
— that encourages consumption and discourages savings. As a laboratory,
these currencies can express a very broad range of monetary policies and
even political perspectives.
The underlying invention, however, that secures the entire network is
almost exactly the same across all of these currencies.
Senator Tkachuk: In previous testimony, we've heard about the
miners, the people who actually issue or mine the currency. There were some
stories in the paper in June of this year where a company had over 51 per
cent of the mining market for bitcoin, so it was developing like a quasi- —
Does it have the ability to develop a total monopoly? Can one company
develop a total monopoly in issuing bitcoins, and then does that jeopardize
the whole currency itself? Are there controls on that, or how does that all
Mr. Antonopoulos: It's important to emphasize the fact that the
purpose of mining is to secure and verify all transactions. The reward for
mining is currency issuance. We must not confuse the reward for the main
purpose. Mining is rewarded with currency issuance for securing the network,
and the reward acts as an incentive to ensure that the network remains
The company in question, which is a mining organization, operates as a
pool, similar to a lottery pool, which means they didn't control the hashing
directly. They acted as a central location whereby many independent miners
could pool their hashing power and put it behind this in order to achieve
smoother returns on hardware investment. If you play the lottery by
yourself, you may win but on a very irregular schedule. If you play as a
part of a pool, you get lower payments more frequently.
In a similar way, because mining is a competitive function, individuals
do not fare well — they get very volatile payments — so instead they pool
their actions together. Interestingly, when GHash approached but did not
reach 51 per cent — but when they approached the high forties — this led to
a market response, and the market response was such that individual miners,
recognizing the potential risk to the reputation at least of the network —
although I don't think it was a serious technical risk — withdrew their
mining capacity from that pool operator and redirected it to other pool
operators. Shortly thereafter, GHash.IO had their cumulative mining power
dropped to what is at the moment slightly below 30 per cent of the total
power of the network. That provides a very good level of protection against
individualized attacks, because that's a very big amount but, at the same
time, it's not big enough to provide a monopoly.
On a technical note, a mining pool or an individual miner achieving the
majority of the network can potentially disrupt the transaction processing
function of the network for a short term. However, they cannot steal funds,
redirect funds or invalidate transactions from the users; they can only
delay them and delay the processing. So it's not as big a risk as most
people believe it is. Because of the market mechanisms behind it, we have
seen again and again that it is a self-correcting system.
Senator Tkachuk: Just so I can understand whether it's just a
method of exchange or a natural currency, if I have yen in Canada, I really
can't buy anything. I have to go to a bank and exchange it, because no one
takes it. So I have to go to a bank and exchange it for Canadian dollars so
I can buy something, and it's the same in each country. In each country,
those dollars have certain value, so even though my Canadian dollar trades
up and down as compared to the U.S. dollar, and so does everybody else, I
still deal in Canadian dollars. It basically stays the same for Canadian
products, unless it depends heavily on imports and all the rest of it.
Does the virtual sphere itself have its own stability? In other words,
when something is priced in Europe for one bitcoin and I have one bitcoin,
can I buy that for one bitcoin, even though the value of that bitcoin has
changed in relation to the currency of my country or the American dollar?
Mr. Antonopoulos: The exchange rate between bitcoin and individual
currencies, such as the euro, the Canadian dollar and the U.S. dollar, et
cetera, has sufficient liquidity that arbitrage is possible between the
various exchanges, meaning that the purchasing power of one bitcoin is the
same no matter what the national currency. The fluctuations are miniscule.
If I could buy bitcoin for fewer Canadian dollars and sell it for more U.S.
dollars, it would create an immediate opportunity arbitrage between the two
markets; and that's exactly what is happening. In fact, arbitrage in bitcoin
is, in many cases, even more effective because the bitcoin can be
transferred between exchanges almost instantly across borders, whereas in
traditional financial markets, moving money like that takes a bit longer.
The differences between national currencies even out quickly and there
are no fluctuations. My bitcoin purchasing power, while volatile overall, is
the same as across any national currency.
Senator Tkachuk: Is that where we're heading, where
internationally things will be priced, bought and sold in bitcoins no matter
what is happening underneath to national currencies only because you save so
much money in exchange and all the rest of it? Is that where we're headed?
Mr. Antonopoulos: I believe that in the long term bitcoin will be
stable enough in terms of volatility that it will be possible to price
things directly in bitcoin. At that moment, bitcoin becomes almost a
universal currency in terms of its utility across the Internet. At least on
the Internet, that would make it extremely competitive against national
currencies in terms of ease of use and flexibility. I would expect that to
happen. However, I think we're several years away before the volatility of
the currency is such that things can be priced directly in bitcoin.
Senator Tkachuk: Bitcoin can be stored. Senator Gerstein, I don't
know where you keep your bitcoin. Do you keep it in your wallet, or is there
a virtual wallet where you keep your bitcoins? Can you do that?
Mr. Antonopoulos: This may be a tiny bit too technical, but I will
provide some insight. The bitcoin is not stored by individuals but on the
network on the public ledger; so the public ledger knows who has the
bitcoin. Senator Gerstein has the keys that allow him to sign for
transactions, essentially signatory control over those funds to unlock them.
How you store the keys can depend as there are many ways to store the keys.
Effectively, they are just numbers. For my protection, I print those out on
pieces of paper and put them in a physical medium. I also have keys that
control smaller amounts of bitcoin, spending change if you like, on my
mobile phone. I have some on my desktop and some on hardware devices that
I'm trying out. The vast majority I keep printed out on physical copies
because it's more secure as they cannot be hacked; you would actually need
to break into my house.
Senator Tkachuk: Companies or businesses will do so many multiple
transactions, thousands or millions in a day for all I know. Can bitcoins
adapt to that? Can you do a payroll for 1,000 or 500 or 200 people easily
with bitcoins? Can you do the deductions and all the rest of it, or is it an
Mr. Antonopoulos: Not only can you do that, but a medium-skilled
programmer can do that in a few hundred lines of a programming language like
Python accessing the entire financial network and instructing it to do that,
which is fascinating. Not only that, but they can do that with transactions
to a thousand people living in 100 different countries, which is almost
impossible to do with today's money. You can do payroll. There are many
companies in the technology space. For example, Google pays tens of
thousands of affiliate companies for advertising revenue. The cost to them
to pay these companies for that revenue across the world is enormous. The
possibility of automating that and using a single currency for electronic
payments can be done extremely fast, extremely efficiently, cheaply and
Senator Tkachuk: I like it.
Senator Maltais: I agree with my colleague Senator Campbell, who
said that people of a certain age may have trouble using this currency. We
had them bring a bitcoin machine here, and the chair generously purchased
one hundred dollars' worth of bitcoins. He never mentioned them again. We do
not know what happened, if they were lost in the ether, but that is not your
You said that a bitcoin user could predict their market value in 30
years. If a bitcoin user like our chair could predict what their value will
be in 30 years, I do not understand why the Minister of Finance has not
already come to get him to ask for his advice on what could happen in five
years in the economic and financial sectors. Thirty years is a long time.
You are rather talented psychics, if you can predict what the money supply
will be in 30 years. I wonder what you can tell me about that.
Mr. Antonopoulos: In the case of bitcoin, specifically because it
is designed to simulate the extraction of precious metals in its
progression, it is entirely possible to predict with high accuracy how much
currency will be available on the market at a specific period of time. That
does not necessarily mean that supply will meet the demand or that it is the
correct supply. It's just that we know what that supply will be. Today we
can predict to a high degree of accuracy what the supply of gold will be
over the next year because it has been extracted at a very predictable rate,
similarly with bitcoin.
Senator Maltais: I am going to stop you there. Any insurance
company actuary who is calculating an annuity over 30 years can project
amounts that are more or less realistic. He does not need bitcoin to
calculate the money supply in 30 years. He can make some valid
extrapolations using some very simple formulas.
One thing is bothering me, however. Are you not afraid that the banking
system is as we speak in the process of duplicating the bitcoin system? The
banks see things coming. They are able to adapt to new technologies. It
seems to me that when it comes to capital and research on digital currency
technology, the world's banks as a whole are stronger than bitcoin.
Mr. Antonopoulos: Yes, indeed, I think the invention behind
bitcoin, the block chain technology, will have a substantial influence over
the future of banking. I have had several discussions with banks that are
very interested in using similar systems to create more efficient networks
within the banking system. For example, today a lot of clearing operations
for worldwide fund transfer or clearing stock and equity purchases are
handled by intermediaries. Bitcoin would allow banks to handle those in a
decentralized network by simulating the same technology as bitcoin on their
own. Furthermore, banks in the developing world are interested in using
bitcoin to extend services to areas where they can't deploy infrastructure.
Telecommunications companies at first were threatened somewhat by the
Internet but now run entire networks on top of the Internet. Similarly,
banks will find ways to utilize this technology. I would not be surprised if
very big parts of financial services eventually run on top of technology
very similar to bitcoin, perhaps bitcoin itself.
Senator Maltais: This leads me to ask you if you do not feel you
have been gobbled up even before you properly existed? The banks will never
let you have a field in which to operate. I am not referring only to
Canadian or American banks, but to all the banks in the world. I do not
think they will let themselves be swallowed up in this way without saying a
Currently you benefit from publicity in the papers, and the awareness of
young people — and I have nothing against technology. However, I do not
think the banks will let you fleece them without saying a word and without
trying to swallow you. Let us be honest. Bitcoin is not very solid. All of
this is only virtual.
Mr. Antonopoulos: Yes, indeed. In fact, I remember the exact same
discussion when the idea that the International Telecommunication Union
would be thwarted or somehow threatened by this nascent technology called
the Internet was ridiculous on its face. The idea that world leaders,
states, would allow the Internet to give people freedom of expression was
preposterous. The idea that the Internet would be allowed to subvert the
will of despots around the world and would not be instantaneously shut down
whenever they felt it was threatening their authority was preposterous, yet
all of these have happened.
I believe that bitcoin, by empowering individuals — and especially
individuals who do not even have access to the banking facilities we're
talking about — will create a thriving economy of its own and an economy
that will not threaten banks but will open new opportunities for banks. In
the end, just like the telecommunications companies, many of their old
models and old profit sources will be fundamentally disrupted.
Today AT&T's long distance network has been decimated and Skype has
dominated that space. Yet AT&T did not give up. They became the world's
largest Internet service provider.
Eventually I believe bitcoin-like currencies will decimate certain
industries, especially high-profit, low-service industries such as
international remittances, which are exploitative in their nature. However
they will open new industries, products and services, and the economic
activity enabled by bringing together billions of people on a fully
connected global financial system is so much bigger than the potential risk
this may pose to the profits of incumbents.
The Chair: In your comments, which have been fascinating, you made
reference to the fact that one of the great motivators to you personally in
getting involved in this is the technology that it's going to bring to
people who do not have it today, and I think you used the term ''empower''
billions around the world.
If I am correct, I believe Mr. Gates, in his charitable giving in Africa,
is making use of digital currency called m- pesa.
Mr. Antonopoulos: That's correct.
The Chair: Could you expand a little on what impact you see
bitcoin, m-pesa or digital currency in general will have in Africa?
Mr. Antonopoulos: M-pesa is a fascinating study for those of us
interested in digital currencies. It has shown what is possible when
low-friction digital money is introduced into an environment without the
need for massive infrastructure, an environment that doesn't have banking
service well developed.
M-pesa was started as an experiment that allowed individuals to transfer
cell phone minutes amongst themselves and their families by a telecom
provider in Kenya. I imagine the moment this became a currency was a very
mundane moment, such as for example a customer arriving at a store and
realizing they didn't have sufficient money to buy a dozen eggs and saying,
''Can I give you a couple of cell phone minutes instead?'' With that simple
concept, a currency is born.
What is fascinating about m-pesa is that we roll forward just 12 years
and m-pesa is now responsible for 40 per cent of the GDP of Kenya. That is a
staggering amount. It represents the adoption of what was largely an
underground, cash-based economy, one that was illiquid, inflexible and slow
to operate, and turbocharging that by providing enormous liquidity and
fluidity into the economic system.
At the moment, bitcoin is not ready to be adopted easily on the most
deployed platform in the world, which is a Nokia feature phone, the Nokia
1000, of which there are billions. It requires a bit more infrastructure
than that, but gradually we see two trends converging. One is bitcoin being
applied on simpler and simpler technology, and we already see its use
through SMS text messaging. The other one is the collapse in the cost of
producing smartphones, with the Android approaching $25.
There are already applications of the bitcoin space that would allow a
single Android phone to support thousands of simple SMS customers and give
them bitcoin wallets. That would essentially allow a young kid in Lagos,
Nigeria, to buy an Android smartphone and become a bank serving thousands of
customers, simultaneously giving them access to the equivalent of a Western
Union terminal, a credit facility for buying loans, as well as a trading
facility for all of the world's markets, and this off a simple Android phone
and SMS feature phones.
M-pesa shows us it is possible. Bitcoin now makes that phenomenon global.
When we talk about the unbanked, the World Bank estimates that 2.5 billion
people are completely unbanked, living in cash-based societies. However,
that vastly underestimates the problem.
If you look at the types of banking facilities we have in the Western
world, the ability that I have to access a brokerage account with access to
any of the international markets to convert any currency I want without
controls to transmit money to any country in the world I want, again with
few controls, and use it as a simple consumer is very far removed from what
most people have.
If you look at the unbanked as those who have a single currency only,
closed account that does not have access to international markets, credit or
trading capabilities, more than 6 billion people in the world live with that
kind of banking, and 2.5 billion of them are completely unbanked. Bitcoin
can change that environment dramatically in less than a decade.
Senator Black: I would like to again thank you for your
contribution. It's extremely helpful.
I want to move to a couple of final points that I want clear in my mind.
I want to take from your comments, arising from what Senator Ringuette
asked, that we've been exploring through this hearing the opportunity that
may exist for Canada, for innovation, if we get this right. Can you
succinctly tell us what you think that opportunity is?
Mr. Antonopoulos: I think there are two aspects to this. One is
the pure research and technology innovation capabilities that might exist in
the bitcoin sphere. One of the things I'd like to emphasize is that bitcoin
is not just money for the Internet. To look at it simply as money for the
Internet is to miss the point.
Bitcoin is the Internet of money. Currency is just the first app.
Currency is an app running on a decentralized trust network based on block
chain technology, which means that many other apps will exist.
The bitcoin currency is almost the same as email was in the 1990s. It
enabled the growth of the Internet. It was the killer application that made
it viable and worthwhile for people to get involved, but it couldn't
possibly open our eyes to the endless possibilities that came afterwards. We
couldn't envision the Web in the early 1990s, or even Facebook and Twitter
and things like that today.
Bitcoin, the currency, is just the tip of the iceberg. It is the
proto-technology that really brings that decentralized network of trust to
consumers, but there will be other apps, and it's already evolving at a
tremendous rate. From a pure research and innovation perspective, it's
The other thing is to think about the possibilities of extending banking
services. Even though Canada has a highly banked population, there are still
pockets within this country. I know in the U.S. close to 18 per cent of the
population have very limited banking capabilities, and that is probably true
of most developed nations. There are pockets within this country where
people have very little access to banks.
I think the combination of doing primary research in innovation in these
new technologies and opening banking to reach different corners of this
country and disadvantaged parts of the population is a very potent
combination, especially if we take advantage of the international aspects of
Senator Black: How did New York State get it wrong?
Mr. Antonopoulos: I think they got it wrong in many ways, first of
all by rushing to regulate very soon, but more importantly, by regulating
bitcoin in exactly the same way that the banking system currently operates
and failing to see the distinctions between bitcoin and the current system.
The only analogy I can think of is if in the proto-Internet, the Federal
Communications Commission in the United States had decided that the Internet
was simply a sophisticated form of CB radio and required a licence from
every website operator. Such an outcome would almost certainly have
destroyed the Internet industry in the U.S. However, because of the enormous
need for such a tool, it would not have affected the Internet industry
everywhere else; it would simply have pushed that innovation elsewhere.
I think treating bitcoin as a proto-bank account with some fancy features
is to miss the point, and regulating it then as such completely stifles it.
It puts it immediately into the playing field of incumbents. It ties them up
in the same kinds of regulations, and it forces us to behave more like a
bank when its unique characteristic is that it isn't a bank.
Senator Massicotte: Thank you again. I have one technical question
and then a more important question.
On the technical side, many countries and provinces have sales tax
coupled with income tax. For the merchants using your currency, is there
software already in place? For my dollar and cents, there are cash registers
and they have has gotten pretty sophisticated. Is it easy for them to do the
accounting and collect the sales tax? Does that already exist for merchants?
Mr. Antonopoulos: Absolutely. In fact, it's easier with bitcoin
because the public ledger provides a complete record of all of the
transactions. It's as if all of my bank statements from the first moment I
use bitcoin are online. I render sales tax to the State of California for
the business I ran selling products via bitcoin. I also pay my income taxes
in U.S. dollars based on my income, which is entirely in bitcoin. And I do
all of my accounting using traditional accounting software.
Senator Massicotte: You have software in place to do transfers and
the calculations immediately?
Mr. Antonopoulos: Yes, although it's rather cumbersome at the
moment because the modalities are quite different. For example, in my normal
banking — traditional banking, if you like — I have a handful, four or five,
different accounts. In bitcoin, I have well over 2,000 accounts because with
bitcoin, it makes sense to create a new account for every transaction. It's
not really an account. Therefore, if you try to put it into the same model,
it's difficult to work. However, the software is being developed.
Senator Massicotte: You basically answered the question, but the
way I see it, this is a highly secure and anonymous form of transfer of
property. You can call it currency; you're using it now as currency from a
sense of bartering.
It seems this could be very useful in many things, including exchange of
property. Today we have a bunch of lawyers or notaries who acknowledge the
safe transfer of real estate property, but it seems this application could
be used very often in many different facets.
Let's fast-forward five years. How do you see this technology being used
to the benefit of our society? Give me some examples.
Mr. Antonopoulos: There are some very interesting applications.
The decentralized ledger is used as a public record of sorts for all kinds
of things, from registering bicycles to registering automobiles to
registering company shares.
Two days ago, I was at a bitcoin conference where a couple was married,
and their marriage was registered on the block chain for the first time.
They used the block chain as a registrar of that contract.
You could use it to register titles and deeds for properties and transfer
those titles and deeds for any form of property, including vehicles and real
estate. With a simple electronic transaction, you can transfer the deeds to
a car. Even better and more important, the car could look up its own title
and render itself usable to the new owner automatically. This concept is
called smart property, where the property recognizes its ownership through
reference to the block chain.
All forms of decentralized registration can be implemented with a block
chain. Furthermore, you can issue share certificates or any other form of
token that can be traded, from sharing my bandwidth and receiving a token in
return that I can spend to use somebody else's bandwidth to creating
possibilities for sharing economy similar to how we do Airbnb or sharing
cars today. We can do many of those things using digital tokens.
There is a company here in Toronto that developed an application that
allows you, upon submitting a transaction on the block chain, to unlock a
door, for example, for an Airbnb apartment. So your smartphone would make
the payment and also unlock the door to the apartment and allow you access
to that property.
Senator Massicotte: It's amazing. I have a secondary question. I
don't understand the block chain for a couple getting married. Was he scared
to get mixed up with the wife? What's the issue?
Senator Campbell: Let's not go there.
Mr. Antonopoulos: It was largely symbolic and a proof of concept.
This couple was already married under traditional state laws. However, what
they wanted to do was to record their marriage on a record that was publicly
accessible, unforgeable and completely unchangeable through time. It
provides a permanent record of what has happened, an unalterable history
that within an hour is completely unalterable by anyone and will be
preserved through history because of the value of the transactions that
Senator Greene: Thank you very much. I really take your point
about the dangers of inappropriate or premature regulation because we don't
know where this is heading, the pace of change is large and we don't want to
influence, I don't think, the pace of change or what it might lead to.
We have to write a report, and the report will have recommendations. So
my question is, what would your reaction be to a report with just one
recommendation, and that recommendation would be that there be no
regulations and that we revisit this in, say, five years?
Mr. Antonopoulos: I think that would be a very good idea. I think
there is some room for clarification, clarifying, for example, the tax
status for individuals, or at least clarifying the rights of an individual
to make a choice in the currency they use as a consumer and to affirm the
legality of using digital currencies in all forms of commerce as entirely
equivalent with any other national currency, recognizing this is a private
form of barter and transaction, recognizing the corresponding principles,
which I consider neutral principles, but they are principles of
enlightenment, which are freedom of association, freedom of expression and
freedom of conscience. So I think that removing ambiguity in that particular
arena for personal use would be enormously useful.
Senator Greene: I agree. Thank you very much.
The Chair: Mr. Antonopoulos, your reputation preceded you. You may
recall that in my introductory remarks, I did not introduce you as ''a''
bitcoin guru but as ''the'' bitcoin guru.
Mr. Antonopoulos: You humble me, senator.
The Chair: I think I can speak on behalf of all of the members of
the committee in saying that you have more than lived up to that reputation,
and we greatly appreciate your appearance today.
Hon. Senators: Hear, hear!
The Chair: Thank you very much.
(The committee adjourned.)