Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 22 - Evidence - January 28, 2015
OTTAWA, Wednesday, January 28, 2015
The Standing Senate Committee on Banking, Trade and Commerce met this day at
4:17 p.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
The Chair: Good afternoon. Welcome to the Standing Senate Committee on
Banking, Trade and Commerce. Today is our first meeting of 2015 and the
thirteenth meeting in our special study on the uses of digital currency,
including the potential risks, threats and advantages of these electronic forms
To date, the committee has received presentations from a wide range of
witnesses, including government agencies, digital finance experts, academics and
Today we will focus on some of the potential risks of digital currencies.
Various witnesses have told the committee that digital currencies, due to their
digital and sometimes anonymous nature, can run the risk of being used for
nefarious purposes, including money laundering, terrorist financing and drug
trafficking, just to name a few.
To help us to better understand these issues, I am pleased to welcome, from
the Royal Canadian Mounted Police, Jean Cormier, Superintendent and Director,
Federal Coordination Centres; and Drew Kyle, Sergeant and Acting Officer in
charge, Financial Crime, Federal Policing Criminal Operations. And from the
Canadian Security Intelligence Service, we have Michael Peirce, Assistant
We will begin with opening remarks from Mr. Cormier, to be followed by Mr.
Mr. Cormier, welcome. The floor is yours, sir.
Superintendent Jean Cormier, Director, Federal Coordination Centres, Royal
Canadian Mounted Police: Thank you, sir. Good afternoon, Mr. Chair, members
of the committee, colleagues, CSIS colleagues. I am accompanied here today by
Sergeant Drew Kyle, whom you have introduced, the Acting Officer in charge,
Financial Crime, Federal Policing Criminal Operations. Sergeant Kyle has
researched the phenomenon of digital currency, and I may call on him to assist
in answering some of your questions here today.
I would like to thank you for inviting us here today and allowing us the
opportunity to discuss digital currencies.
I am aware of the testimony that has already taken place at this committee,
and that you have heard from many witnesses on what digital currencies are all
about and how they function. I will begin by addressing some of the concerns
that you have touched upon in your previous sessions that relate specifically to
the illicit use of digital currencies, which is of primary concern for Canadian
First, I would like to make it clear from the outset that we fully
acknowledge the many benefits associated with digital currency for legitimate
customers. We know that digital currency offers efficient privacy and security,
advantages that are not always present when dealing with traditional fiat
currencies. Digital currencies are clearly a new frontier, one in which
innovation will no doubt lead to significant consumer benefits for those that
use it for legitimate means.
As with any new and innovate practices, especially the ones that promise
anonymity and the unregulated movement of funds, we can expect that criminals
will employ and exploit these particular aspects to further their criminal
Over the course of your committee's proceedings, you have asked virtually
every witness appearing before you if they were concerned about digital
currencies being used as a vehicle for illicit trade or to launder proceeds of
crime or to finance terrorist activities. Some of these witnesses have expressed
a level of concern, and the RCMP would also like to suggest that digital
currencies represent a real and evolving threat. The RCMP is aware of the
potential for digital currencies to be exploited for criminal use, and it is our
view that the illicit use of digital currencies does indeed represent a threat
to Canada's economic integrity.
Although these may not have occurred in Canada, there are several examples of
large-scale criminal activities that were directly enabled by digital currency.
Most notably online were the black marketplaces sometimes referred to as "dark
net sites." These sites offer access to a wide variety of illicit criminal
consumer products, including illegal drugs, firearms and online exploitation of
children. Digital currencies, specifically bitcoin, with which I know you are
already familiar, have become the near-exclusive payment mechanism for these
As was previously noted by my colleague from Finance Canada, one of the sites
known as Silk Road was shut down by U.S. law enforcement agencies in 2013. This
site moved hundreds of millions of dollars' worth of bitcoin associated with the
purchases and sale of drugs and other illegal goods. It is equally troubling
that Canada was the country of origin for some of the items listed on that
marketplace. In spite of law enforcement action to disrupt the site, new online
criminal marketplaces emerged. For example, one variation was Silk Road 2.0,
which was successfully disrupted again by international law enforcement action
in November 2014. New online criminal markets will surface and require
international law enforcement cooperation to counter the threat, no doubt about
In another example, operators of Liberty Reserve, a centralized digital
currency exchange, are currently before U.S. courts having been charged with
laundering $6 billion through 55 million illegal transactions. Law enforcement
actions in 17 countries, including Canada, were involved in this investigation.
Digital currencies present a tremendous challenge for law enforcement because
decentralized digital currencies such as bitcoin are not bound by the same laws
or regulatory regime as other legal tender.
In essence, bitcoin is stateless and users have the ability to move their
transactions to the country that offers the least resistance — and they can do
all of that, through electronic means, regardless of where they find themselves
on the globe. Essentially, a world-wide value transfer system.
From this standpoint, it is important for Canada to ensure that we are not
viewed as the weak point in relation to digital currency systems. Canadian law
enforcement continues to work with its domestic and international partners to
investigate, share information and help ensure that there are appropriate legal
restrictions around the use of digital currencies without negatively impacting
the benefit that they offer to legitimate consumers.
We recognize that regulating digital currency systems is not the same as
regulating the traditional banking sector and that it presents unique
challenges. You have heard the testimony of Andreas Antonopoulos, author of
Mastering Bitcoin, and agree that care must be taken to ensure that the
virtual currency innovation is not suffocated by regulation. However, we know
that organized crime groups in Canada and around the globe specialize in finding
ways of taking advantage of areas in the economic system that offer the least
amount of accountability and transparency. Regulation could assist in mitigating
that level of threat.
Further, when it comes to money laundering and terrorist financing, the
biggest concern that we have with virtual currency systems, like bitcoin, is the
ease with which transfers can take place across international borders with
little to no oversight. Once an individual has a bitcoin account and the
financial resources to move, it is extremely easy for that individual to
transfer those funds to another bitcoin user overseas for virtually any purpose.
From a law enforcement and public safety point of view, it is these
transactions which concern the RCMP, and we believe a regulated system which can
trace and detect such transactions would assist law enforcement and our partners
who are engaged in the fight against money laundering and terrorist financing.
The Canadian government is in the process of implementing legislation that
would place virtual currency markets, such as bitcoin, in the same category as
money service businesses under the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act. This means that they will be subject to the same
reporting requirement as money service businesses to ensure that activities
taking place within the exchange do not violate laws related to money laundering
or terrorist financing. This is consistent with actions being taken by our key
international partners, including the U.S., the U.K., Australia and New Zealand.
In conclusion, reform is a tool that the RCMP welcomes and that will serve to
support Canadian law enforcement efforts in combatting the misuse and
exportation of digital currency innovation for criminal purposes.
Again, thank you for inviting the RCMP to participate in these important
proceedings. I will be happy to address any questions the committee may have.
The Chair: Thank you, Mr. Cormier. Mr. Peirce, please proceed.
Michael Peirce, Assistant Director, Intelligence, Canadian Security
Intelligence Service: Good afternoon, honourable senators and colleagues
from the RCMP. Thank you for the invitation to discuss digital currency and
potential risks posed by this new technology to Canada's national security.
To contextualize my comments today, I would like to begin by briefly
describing the mandate of the Canadian Security Intelligence Service. As you
know, CSIS is mandated to investigate threats to the security of Canada as
defined in the CSIS Act. Those threats include terrorism and extremism,
espionage and sabotage, and foreign interference. The investigative function is
complemented by our duty to advise the government to take the information that
we collect to analyze it and share it with government departments and agencies.
In addition to the service's assessment function, which I will speak a little
more about later in my comments, CSIS uses financial intelligence to advance its
investigations of threats to the security of Canada. CSIS conducts this through
its financial analysis unit, FAU, which is mandated to support operations and
investigations through the provision of analyses of financial intelligence.
Financial intelligence not only supports investigations linked to terrorism
but also supports those related to proliferation and espionage. The FAU also
explores ways to better manage financial information, resulting in more
operational leads for our investigations. It is a key role that they play. In
addition to its own authorized collection, the FAU receives intelligence from
partners such as FINTRAC, for example, which is authorized to proactively
disclose information to CSIS that it believes is relevant to threats to the
security of Canada.
Technological developments such as digital currency are clearly of interest
to the service. In and of itself, new technology does not pose a direct threat
to national security, but to the extent that it may be leveraged to facilitate
threat-related activity, we have a responsibility to remain aware, up to date
and informed about things like digital currencies.
While digital currencies and online payment systems may become a financial
tool for threat actors in the future, they currently do not represent a
significant cause for concern from a national-security perspective, partially
because they are relatively volatile and not conducive to the kind of quick or
easy use that we might see from individuals travelling for purposes of
To date, digital currencies have not been seen to be a significant means of
funding or facilitating threats to Canada's national security. We are faced with
a fluid threat environment, however, and we know that terrorist networks and
other threat actors are adaptable and opportunistic. Digital currencies
certainly hold the potential to become a tool for threat actors in the future.
There have been media reports, for example, of ISIL, the terrorist group in
Iraq, mentioning the use of bitcoins. There was a blog, for instance, that made
a reference to bitcoins and encouraged their use. However, we've seen no
significant adoption of bitcoins by ISIL.
Nevertheless, financial intelligence, including, to the extent applicable,
digital currencies, is examined in the context of CSIS intelligence assessments.
Those assessments are then disseminated to our government colleagues and other
client departments. These assessments draw on all sources of intelligence,
including financial intelligence. They're outward-facing and strategic in
nature. They enhance the government's awareness and understanding of threats,
they inform policy discussions, they support decision makers responsible for
administering and enforcing Canadian law, and they identify emerging issues in
the global threat landscape.
Classified CSIS threat assessments are shared widely with partners such as my
colleagues from the RCMP regularly, Canada Border Services Agency, Public
Safety, Finance, and FINTRAC, to name some of the departments relevant to the
discussion today. The timely dissemination of our assessments is critical, as it
enhances our partners' situational awareness and allows them to consider their
response to any new developments or trends, including in relation to the use of
new technologies, such as bitcoin, for instance.
To be clear, this is in addition to the operational cooperation we see
between, for instance, the service and the RCMP, as well as provincial and
The service's intelligence assessment function is also integral to the
conduct of our investigations. So while we produce outward-looking assessments,
our analytical work is increasingly integrated with our collection and
operational activities. Just as my analysts within my directorate draw on
insights gained through the service's operations, the same analysts provide
direct support to operations. Those core functions in the service are mutually
It's important to stress that CSIS is not an enforcement agency. We are not
authorized to arrest individuals for fraud or terrorist financing. CSIS does,
however, support its partners in their efforts to administer and enforce
Financial intelligence continues to grow in importance as an element in the
detection and investigation of threats to Canada's national security.
Investigating and piecing together the financial trail of those posing a threat
to national security has become an essential step in protecting Canada and
Canadians. Certainly individuals can only engage in threat-related activity to
the extent that they have the means to do so.
Of course, the details of what our specialized units, such as the financial
analysis unit, do and how they do it must remain classified. I'm sure you will
appreciate that, so as not to jeopardize our ability to investigate threats to
the security of Canada. Nevertheless, by sharing information with our partners,
the service allows them to take action in accordance with their mandates.
I will leave it there, and we will be prepared to respond to questions.
The Chair: Thank you very much, gentlemen, for your opening remarks.
I'd like to start by referring back, and there are three words that have
stuck in my mind in terms of our study: privacy, anonymity and traceability. We
had a very interesting meeting in December where two witnesses from the same
institution disagreed over whether bitcoin transactions can be completely
anonymous. One said that some transactions can be completely "off the grid," as
she called it, where the parties involved in the transaction are completely
untraceable and undetectable.
Her colleague — again, I mention, from the same institution — said that her
interpretation was a myth and that all transactions were traceable in some way
or another, under various methods, and that law enforcement is in fact able to
trace bitcoin transactions back to individuals. Although it may not be easy, it
can be done.
We have heard many contradictory views on this subject. I would like to ask
for yours, if I may.
Mr. Cormier: Certainly. I think that to be able to explain how private
it is, how anonymous it is, or undetectable it is would require some technical
knowledge that I don't have. Therefore, I will provide you an answer based on my
knowledge of the digital currency world.
It is a fact that it can be detected. However, it is still being studied, and
we still need to develop the tools to allow us to detect it as well. It is
certainly a complex thing that requires many analyses, obviously, of different
systems because the distribution of, for example, bitcoin is done through
multiple computers located around the world, so you can imagine the difficulty
in identifying the connection between the different computers and where it
originated and where it ended at the recipient end. It is a very complex
We are working on developing the tools to allow us to do that. The reason I'm
saying it is detectable is that I know that from international partners who have
conducted investigation into digital currency that have seized computers. For
example, in one instance that has gone to the court in Germany, the "command
control computer" contained approximately 6 million pounds of bitcoin that was
seized and forfeited as proceeds of crime. That is an indication that there is a
way to detect where it is located and where it is coming from, but it is a
Senator Tannas: Superintendent Cormier, you mentioned that there are
countries that are leaders in developing rules and investigative techniques and
so on. Who would you say are the leaders and why and what are they doing?
Mr. Cormier: That's a difficult question for me to answer. The leaders
would be the countries that have had the most exposure to it. For me to name one
country or another would be difficult because I simply don't have that
knowledge. The RCMP working with many international partners that have a
different piece of the knowledge that we need to pull together to be stronger in
addressing the issues is essentially the approach that we are using.
Senator Tannas: Is there really nobody that you are learning from and
saying, okay, these guys are ahead of everybody in this area?
Mr. Cormier: No, not specifically.
Senator Tannas: Fair enough. Mr. Peirce, would FINTRAC be tracking or
watching transfers from bank accounts to bitcoin? That would be from cash to
bitcoin. Is that something where the banks would be required to talk about
suspicious transactions and that sort of thing? Would there be any requirements
for the banks to be watching any conversion of funds out of a bank into bitcoin?
That may be out of your expertise, and if it is, that's fine, but I wondered
Also, have you seen or has anybody seen much in the way of commerce around
buying weapons with bitcoin?
Mr. Peirce: First of all, let me thank you for giving me the out up
front. It is certainly beyond my expertise and something that FINTRAC would be
better able to speak to. I can go as far as saying that they do monitor some
transactions between banks and bitcoin, but the exact nature and flow would be
beyond me to comment.
In terms of arms, of course, from my mandate's perspective, I would be
interested in it only to the degree that it's relevant for national security,
and in that context we have not seen anything.
The Chair: Was that your concluding —
Senator Tannas: That's it.
Senator Massicotte: Thank you for being here. This technology is
transparent and complex. We need your help to fully understand it. Mr. Cormier,
it is clear so far that it is not necessary to do any research on the transfer
of funds or the identification of bitcoin owners. It is not a threat to our
economy and is not encouraging fraud in Canada, at present. This technology
raises some concerns, but so far, the government and society in general is not
too concerned. Is that right?
Mr. Cormier: Yes, that is a good description. However, we are
concerned that the more this technology is used and develops, the greater the
risk of it being exploited for criminal purposes.
Senator Massicotte: Mr. Peirce, given your international knowledge,
you agree that this new currency is in no way a threat at present. So there is
nothing to be concerned about, as a society, when it comes to this new currency?
Mr. Peirce: I completely agree.
Senator Massicotte: However, in your briefs, you both mention that
this tool could one day be used for criminal purposes. Our committee is very
interested in that. Clearly, this international currency is geared toward the
future and represents major growth. In terms of the act that was just adopted,
you mention that FINTRAC will be able to obtain information about transactions
worth over $10,000 Canadian. Are there any other recommendations that the
government should make regarding the regulations or the act itself? Are you
satisfied with the tools that will be available to you in the next 5 or 10
Mr. Peirce: I would certainly be hesitant to go with a five-year
timeline. To tell you the truth, the threat environment changes rapidly. Of
course, technology evolves very quickly, and the ability for individuals or
organizations to take advantage of technology could change very rapidly as it
becomes more accepted and more broadly available. So I think the timeline for
any potential threat development is much shorter than the five-year period.
The current circumstances, we don't see any active threat activity in that
regard. When we look ahead to regulation, I think that the information we've
provided so far and in response to your questions will answer anything that
would help you support policy development, but ultimately we'll leave the policy
development to those who have expertise in policy.
Senator Massicotte: So far, nothing new is needed, but what might
constitute a threat? What could change immediately and how? What is the most
likely threat to our society?
Mr. Peirce: Let me take it to a slightly different context but one
that's analogous: the use of social media. If we looked at the use of social
media just a couple of years ago, we would find very limited use in terms of
overseas active radicalization and recruitment of individuals in Canada to
travel for the purpose of terrorism. We see that as a regular practice today. It
evolved extremely rapidly, and individuals are using it.
As we see individuals come to the portable technology and determine that
their current ways of operating are being exposed, they'll find other means of
doing it, and I would expect that they will look to opportunities like bitcoin
and determine whether those are effective. But the environment changes so
rapidly that it's very difficult to say: Here's a timeline; this is what we
foresee; this is how they'll do it. We didn't necessarily see that kind of
timeline with the use of social media, and I think it would be beyond us to
Senator Massicotte: What can we do as a committee so that we can be
mentally prepared? I assume this is an international criminal threat. This
anonymous currency could be used for terrorist purposes or as ready cash for
these organizations. If that is the case, I suppose that that is the threat, but
what should we do as a country? According to you, with a little effort, we can
identify the currency's owner. What other methods should we use to determine
whether we have lost control? What does the future hold for us in that regard?
Have other governments around the world adopted measures that are different from
Mr. Peirce: I think ultimately the question will be whether, with
evolution of the technology in support of bitcoin or other forms of
technological money transfer, there comes a point at which we need powers to
assist us to ensure that there's either documentation or an ability to pierce
the veil. We're not in that situation currently, though.
Senator Massicotte: So you think that if the technology enables us to
identify the owner, that is enough? Only new technological developments could
adversely affect that, and that is what you are most concerned about. Do you
agree with that statement, Mr. Cormier?
Mr. Cormier: I agree. However, in some cases, bitcoins have been used
as a method of payment for criminal activities that we have been unable to
detect. The complexity and duration of investigations to identify the initiators
and recipients of transactions, without other tools that would help us identify
them more quickly, is a problem. As my friend explained, technology is quickly
evolving, and so are the criminals. This is not a system we can detect quickly.
Quick identification of fraudsters is a problem and a major challenge.
Senator Massicotte: It is feasible. It is just a question of time. The
solution is not in the act. So would the solution be to hire experienced
individuals or acquire more powerful computers?
Mr. Cormier: No. The solution would be to implement a regulatory
system similar to any banking system that carries out financial transactions. If
a transaction takes place, such as a deposit in a bank account, that involves
millions of dollars converted into bitcoins, the bank employee receiving these
funds should be able to identify the client in question and have the client's
file in hand.
Senator Massicotte: Since this is a virtual currency, on the computer,
the goal of the bitcoin concept is to avoid going through the banking system. I
do not understand the usefulness of bitcoin if we are to continue to have bank
accounts. In this case, bitcoin's value becomes null.
Mr. Cormier: Yes, but it can be converted.
Senator Massicotte: It escapes me. I will have to think about it and
come back to this question.
Senator Bellemare: I have two questions about the discussion we just
had. First, could you please give us a real example of a situation where bitcoin
was used for criminal purposes? I am not talking about in Canada. You said that
there is not a lot here, but that there is elsewhere. Could you give us a real
example using A, B and C, where A gives to B, who gives to C?
Then, Mr. Cormier, you said that there are measures being taken by foreign
partners, including the United States, the United Kingdom, Australia and New
Zealand to thwart the use of digital currency for criminal purposes. Could you
tell us more about that?
Mr. Cormier: Would you mind if I answered in English?
Senator Bellemare: Not at all.
Mr. Cormier: Because my notes are in English.
The primary example where digital currency was used would be as observed by
the Canadian Anti-Fraud Centre in a ransomware scam, where to decrypt files on
victims' computers the demanded ransom payments be made in bitcoin. So that's a
Since 2013, the Canadian Anti-Fraud Centre has received over 3,000 complaints
involving ransomware scams. The people that do this essentially infect
individual computers, and typically they're bigger computers with lots of
information. People don't want to lose their data. They ask for ransom to remove
the virus from their computers. Because those people are used to dealing with
the digital world, the ransom money is to be paid in bitcoin. That's a good
example of where it has been used.
Senator Bellemare: So bitcoins are sent to another account and nothing
can be identified?
Mr. Cormier: No. In the case that was investigated, the individuals
did not have the bitcoins to pay. At the end of the day, the virus remained in
the computer and all the data was erased.
Although, in this example, the ransom was not paid, it was requested in
Senator Bellemare: All the data was erased, so there is no way to
trace where the request originated?
You mentioned certain countries that have adopted legislation on this. What
are those countries doing?
Mr. Cormier: I did not say that they had implemented legislation at
present, but they are in the same position as we are and want to adopt their
legislation to reduce this threat.
Senator Bellemare: So they are still doing research?
Mr. Cormier: Yes.
I don't know about intelligence.
Mr. Peirce: Yes, it's the same situation.
Senator Campbell: Thank you. To start, I should tell you that my
regimental number was 27310. To put this in context of what I'm going to say, it
means nothing to everybody else, but you will know it was after the horses and
at the start of the cars.
I'm not trying to minimize it, but what we're really talking about is law
enforcement and security catching up with technology. It's virtually impossible
to get ahead of it because you're not sure where it's going to go. It's really
no different than when cellphones came in. We were stymied with messaging,
social media and all of this.
One question I want to ask: What would be the ongoing liaison between
agencies with regard to bitcoin? I assume that CSIS and the RCMP have some sort
of an ongoing liaison. Where else would we be looking from both the intelligence
and the law enforcement community? This isn't going away. We obviously don't
have a handle on it yet. We don't even know whether you can trace it or not. One
expert says you can trace it, and another says you can't. Are we looking
worldwide? What's the cutting edge on this? That's my first question.
Mr. Peirce: Maybe I'll start with a response, Senator Campbell. We do
consult with other agencies around the world.
Senator Campbell: I don't need their names. I'm just trying to get
some idea of whether there's a global concern about this.
Mr. Peirce: What I'd say is that I haven't heard anything from our
colleagues through our consultations that differs from the assessment I gave
you, which is currently that we do not see the use of bitcoin as an active
vehicle, as a threat vector for us. We see the potential for its future use, but
that's to be determined down the road. Certainly that's the same message we're
getting back from our discussions with international partners. Domestically, we
work closely with the RCMP, with FINTRAC and with the CBSA. We share our
assessments with Finance and other government departments and agencies, and
we're consistently on the same page in our view and our approach.
Mr. Cormier: It's essentially the same from the law enforcement
perspective. Obviously, the fact that we are looking for tools and proposing
that you consider the implementation of tools that would help with
investigations is not to instill panic and say this is a widespread issue at
this time. We believe that because we have seen cases already where bitcoin is
being used — for example, ransomware, getting the ransom — it is something that
is out there, that we need to be aware of and needs to be addressed. If we don't
pay attention to it, it's going to proliferate and the problem will get worse.
At the same time, whatever regulation would be put in place, it's not to cripple
the innovation, either.
As far as cooperation with other law enforcement around the world goes, we do
learn best practices from other agencies. We do communicate with our partners
around the globe in relation to their experience and their exposure. We also
learn as much as possible from the virtual digital currency world, and they
learn from our exposure to it, as limited as it may be.
Senator Campbell: I suspect there are a lot more Silk Roads out there
than we're aware of. I don't know what the answer is, and you may not either,
but how do you get out in front of this thing? Under traditional investigations,
I'd go undercover, I'd have snitches and there would be wiring, but that doesn't
work here because it's so closed. What's the answer? How do we move forward when
I assume that traditional methods will work to a point? For instance, do we have
anybody trained within the force who understands bitcoin, who actually could go
out there, navigate it, including the legal part? Do we have people trained in
Mr. Cormier: Well, I think you have seen some of the real experts who
were already in front of the committee. The expertise that we have within the
RCMP right now is certainly a work-in-progress. For example, when I speak to my
friend Drew here, he says he knows about bitcoin but really he probably knows
only about 10 per cent of what a person really should know to be considered an
expert on the subject. So it is a work-in-progress.
How you get ahead of it? I will give you an example — maybe through the
regulatory process, if it existed. Let's say there is a supercomputer in Canada
that is utilized as a central repository to mine bitcoin. The regulation would
have those registered with Finance Canada or with somebody that would oversee
Senator Campbell: We've heard time and time again that the problem is
that they are not going to be regulated. They are not going into one computer.
The whole system is set up so that it's not possible to do that. So basically we
make the rules, and they simply ignore the rules. We have no expertise or any
way of finding out who is ignoring these rules. That's the real problem. This
certainly won't be the last thing that we see come up that is digital, but
that's the difficulty we have.
The committee may want to make a recommendation that we put regulations in
place. Well, that's fine, but if the people you're putting them in place for
aren't going to follow them and there's no way of tracking them, it's not going
to work. I have sympathy for you, believe me.
Mr. Cormier: I understand the challenge that you are explaining there.
You are essentially explaining the challenge, because for any regulation, you
are right, it is only as good as what people are willing to comply with,
clearly, just like the legitimate banking system. There are still people out
there that do transactions and do not comply with the regulations that are in
Senator Campbell: But they're easier to catch.
Mr. Cormier: True.
Senator Greene: I'm reassured by your testimony because I also don't
want us to choke off the new technology before it has a chance to develop and
before we have a chance to know what it can possibly add to our lives. I'm glad
you have not been able to detect any threats, but that's on the one hand.
On the other hand, I'm worried that maybe the reason you haven't been able to
detect any threats is that you haven't paid enough attention to it yet, or you
don't have the right equipment and technology to do so.
Could you tell me how, if you can, you look for threats? Do you have people
or a unit checking the public ledger on a regular basis to determine where the
large amounts are going and to whom they're going, et cetera? Do you operate at
that level of detail?
Mr. Peirce: I will take the first part of it, and I will use the
foreign fighter terrorist traveller threat, because we have seen ISIL, for
instance, calling for the use of bitcoin. When we actively investigate financial
activity in and around travel, if we're seeing the money that supports the
travel, then we have a pretty good idea that they're not using bitcoin; they're
using the money that we're seeing to support that travel.
At this point in time, we're seeing the money. So we have reason to believe
that, in fact, bitcoin isn't being used to any significant degree in that
That's how we know our current coverage.
Senator Greene: It's a process of elimination?
Mr. Peirce: Exactly. Over time, as the technology develops, as
individuals become more comfortable with it, it becomes more pervasive, if we
see ourselves going dark, then we will have concerns; but right now we have a
fairly good handle on the situation.
Senator Greene: With regard to my question on the public ledger, do
you have people or technology at this time analyzing it and looking at it and
Mr. Cormier: That is ongoing research. We even have bitcoins of our
own for the purpose of exercise and developing expertise around it, so we do
have digital wallets that we use to educate ourselves.
Obviously, it is a complicated process, and not to argue my friend's point,
but from an intelligence point of view, as well as to what is going on out
there, from a law enforcement perspective, certainly, we only know what we know.
We get intelligence from different methods, obviously. Some are human-sourced,
some are generated from other partner agencies, some are from other law
enforcement agencies around the world, and from that we try to identify exactly
what is coming our way, whether it is six months or a year or two down the road.
Senator Greene: Aside from the event in Germany that you mentioned
earlier, are there other international examples? Or is that a one-off?
Mr. Cormier: That is one I recently became aware of. There were the
other ones that were conducted by the U.S. as well that I mentioned, but I don't
know that the U.S. seized anything.
Drew, would you know if in the U.S., with the reserve and the investigations
they did, did they seize any assets in the U.S.?
Drew Kyle, Sergeant, Acting Officer in charge, Financial Crime, Federal
Policing Criminal Operations, Royal Canadian Mounted Police: No, I don't
know that. I don't have that answer for you at the moment, but it's quite
possible. Again, those investigations would have started not, in all likelihood,
out of the bitcoin. It would have started from, for instance, the Silk Road
because of what they were trafficking in as opposed to the actual currency used.
Senator Greene: In general, do you see the use of bitcoin as an
indicator of crime, other crime, or as the crime itself with respect to its use?
Mr. Cormier: No, from my perspective, from a law enforcement
perspective, it is not the crime of transacting the bitcoin; it is what it is
financing, typically, the activity it is financing.
Senator Greene: So it is an assistant to crime.
Mr. Cormier: Exactly. It could also be used, for example, for money
laundering; that would be the closest to being implicated in the crime itself.
Senator Ringuette: I have many questions. Mr. Cormier, when you gave
us the different examples in the U.S. and so forth, and I guess that the bitcoin
activity was one of the currencies used for that criminal website, you indicated
to us that you are working on tools. Digital currency is digital currency around
the world. Do you have any partners nationally or internationally that have
developed a certain technology that you could readily make available to your
units in regard to bitcoin or other digital currency without reinventing the
wheel, if a wheel is already in existence?
Mr. Cormier: I essentially don't have the answer to that, but I can
tell you we do work with different partners: the industry that is involved in
the technology, the private sector, as well as other law enforcement and
government departments that all have an interest in it and are all involved in
the research and how to address the issue.
I'm not sure if an actual tool exists. I would think that if an actual tool
existed that we could employ, we would acquire that tool.
Senator Ringuette: But your network of law enforcement entities, are
you working together to know, first of all, if one exists or if one entity is
more advanced in regard to creating the necessary tool?
Mr. Cormier: Our technical operation office is certainly connected
around the world, and I'm sure they are. Like I say, that's not my area of
expertise, but I'm sure they are working with international partners in
developing those tools and that they would be aware if there was a tool
somewhere else that they could leverage.
Senator Ringuette: In regard to regulation, I can understand that as a
law enforcement entity you would like to have regulation in case you
accidentally happen into a situation where digital currency is being used in
criminal activity. I can understand you want that.
I'm looking at FINTRAC, and the way that FINTRAC and probably CSIS get the
flow of money transactions nationally and internationally because of their
partners. The regulation imposes requirements on financial institutions, whether
they're banks or insurance companies or payday loan entities, whatever the
financial entity, to report those transactions to FINTRAC to be analyzed.
With regard to bitcoin, there is no entity, except that maybe down the road
we will have bitcoin ATMs in Canada. But even then, it remains anonymous; you
don't have a name. You don't have a source. I am trying to imagine what kind of
regulation could be important enough to help you identify the entities, because
with digital currency, it is not possible. You have a computer, and maybe you
can detect a computer somewhere down the road with a certain tool, but who is
using that computer?
The ledger is all over the world. You can't expect a million computers
containing the bitcoin ledger to report the financial transactions to FINTRAC.
I'm trying to imagine what kind of regulation would enable you to seek what you
are trying to do with regard to criminal elements.
Mr. Cormier: From a law enforcement perspective, I don't think I have
the answer as to exactly what regulation would help us enforce it. I'm hoping
that the committee, after hearing from all the different witnesses, hearing what
may exist and what may not exist, might be able to identify and recommend
something as well. It would be helpful to law enforcement in that regard.
Maybe the system has gone too far already without regulation, and it is out
there to try and bring it back to a system that can be monitored.
Senator Ringuette: Exactly. Is it an entity that can be regulated
Mr. Cormier: That's what I'm hoping the committee can come up with
after the different witnesses you hear from.
The Chair: This whole study reminds me that, many more years ago than
I would like to imagine, I had the privilege of sitting as a member of the board
of directors of Canada Post. I can remember an individual came forward to
present to the board a discussion about email. Nobody had ever heard of it.
In his presentation of the concept, nobody could even imagine that it could
ever develop into anything. It is not unlike that state that I find myself when
we start to deal with this situation. If we start off on the basis that I go
back to my opening comment to you of calling this meeting to order, and I'm
repeating it as much for myself as I am for you, this is a special study on the
uses of digital currency, including the potential risks, threats and advantages
of these electronic forms of exchange.
We have seen, in other countries — Russia, China — that it's basically
illegal, can't go near it to varying degrees, we're not going to let anyone come
close to this. We have had witnesses come forward and talk about how Canada
could take a lead role in creating an environment where this whole concept,
which will take years to develop, could find a home and be very advantageous to
the country on a global basis.
I suspect when we sit down to write our report you will have the spectrum on
one end of banning it, and you have the spectrum at the other end of creating as
open an opportunity as there is to develop it, with regulation. There is a
needle that will fluctuate between that. Where do you feel we should be going
with this? Should we be creating some kind of a very friendly environment for
this development — because it is taking place, we're not going to stop it — and
try to facilitate the regulation that surrounds it? Or should we be leaning
towards the other end, that we should be 20 years behind the cutting edge on
this, let the other guys take the risk and see if we can catch up in some small
way in the future? What do you feel about the whole situation?
Mr. Cormier: As I mentioned in my opening remarks, and I repeated it
again, whatever regulation that is put in place should not cripple the
innovations, obviously. I think innovation will happen no matter what. It is a
matter of finding the right balance. I am not quite sure what that right balance
Mr. Peirce: I would say I'm policy-agnostic, to be frank. The point of
my testimony is to advise you of the current circumstances that we see. I don't
want to be seen as suggesting that we ban the Internet or that we open the
floodgates to everything. That is for the policy work to be done. I am here to
provide advice on the national security landscape.
The Chair: Sergeant Kyle, perhaps you might have some observations on
what we have talked about so far. Is there something you would like to add?
Mr. Kyle: The only observation I would have is that I echo your
comment on the email. I came into this looking at Silk Road and knew nothing
about bitcoin, and you have heard from some of the best people on that topic
without a doubt, as far as I'm concerned. I couldn't begin to touch what Mr.
Antonopoulos knows about the subject matter. It is one of those areas developing
so fast that we are trying to get a handle on what we do know.
Senator Tkachuk: We have been told by the experts here that the reason
bitcoin and digital currency were developed is that they didn't trust the
financial system because of what was going on in 2008. Many of them come here
and say now that they want to be regulated. It seems to me that once governments
start doing that, they have to realize that if they regulate it, they have to
recognize it as some kind of currency and back it, otherwise what are they
regulating? It would be like regulating mint products.
It's not something that is easily done. I haven't seen from any testimony
yet, and I would like your comments on it, if there are transactions in
bitcoins, in the end they need cash. You have to pay people in the illegal
business. You pay people all the way down the system. They have people that are
distributors for their product. The distributors, the salesmen and all those
people have to be paid. They're not going to accept bitcoin. They're only going
to accept cash. Sooner or later, you catch the person because they need the cash
to keep in business. They need backed cash.
Am I understating that? I don't know if I am or not because I don't see this
as being as big a problem as people make it out to be at the moment.
Mr. Cormier: I will ask my friend Drew to answer.
Mr. Kyle: I would agree with you that in today's world that is the
case. That is what Mr. Cormier was expressing where it comes back to the banks,
eventually going in with currency. However, you don't have to go far on the
Internet to find that there's a great deal of lifestyle and life that can be
lived on bitcoin now, from coffee shops in Vancouver to home purchases. Season
tickets for NBA basketball teams can be purchased with bitcoin. I use those as
examples simply because this technology is a couple of years old — maybe three,
four, five years old — and yet already there's a significant amount of product,
for lack of a better word, that can be purchased.
If I'm working in that world, for instance, I run Silk Road, maybe I don't
need fiat currency. Maybe most of what I do in my life I can deal with through a
As more and more acceptance comes, every day you can see more and more items
that you can purchase with bitcoins, straight-up purchase at different places.
Is it more difficult? Absolutely. But I think you will find that in Vancouver
now you can quite easily use bitcoin to purchase coffee at a number of different
coffee houses, as an example.
Senator Tkachuk: I kind of understand that, but if you are doing big
transactions in drugs or guns and stuff like that? I'm not sure if there's a lot
of bitcoin market in Saudi Arabia for Starbucks coffee shops. You know what I'm
Mr. Kyle: Yes.
Senator Tkachuk: For all the people involved, it's a very small
section of the market.
Mr. Cormier: Maybe to add to your question in relation to the
conversion, it is like the money-laundering process. If I want to transact money
and I'm doing money laundering, whether in bitcoin or in real currency, I will
probably go to an area where there's more lax banking regulation and where I can
transact my bitcoin into —
Senator Tkachuk: Those are the big problems. Bad banks.
Mr. Cormier: Those may not necessarily be in Canada, either.
Senator Tkachuk: Right.
Mr. Cormier: Maybe in some of the offshore banking, so to speak, as we
Senator Tkachuk: I will ask that last question. If we regulate
bitcoin, that means we recognize bitcoin as currency of some sort. Right? Once
it is regulated, then it loses its cachet as an easier illegal currency. They
will just invent a new one. It will be another currency, as there is right now.
We have been told there's up to 500, so it would just be another currency that
will be used, again with all the same little problems that bitcoin has had. I
don't know how you keep ahead of the game, is what I'm trying to say.
Mr. Cormier: It is a challenge. If it's regulated, if a regulation is
put in place, it should cover all sorts of digital currencies, not only bitcoin.
We often use bitcoin as the most common one. It is like calling a box of Kleenex
"Kleenex" when they're tissues, because we go by the name brand. Certainly the
regulation would not be only for bitcoin, but for all sorts of digital
The Chair: That concludes round one. I have one senator in round two
to start questions.
Senator Massicotte: This is a stupid question. Earlier you gave us
quite a bit of comfort that we don't have an issue in Canada. At the same time,
you acknowledged that you only know what you know, and you made a reference that
we probably only know 10 per cent. I felt comforted by your earlier statement.
Now I'm nervous again about the whole issue because you could be very much
wrong. There's 90 per cent you don't know.
Maybe give me a comment. How aware are you as an organization of bitcoin? How
informed are you? You said you transact yourself. Do you have a wallet? Do you
actually buy coffee with your bitcoin and so on?
Mr. Cormier: Not myself. I just want to go back, because the 10 per
cent that I made reference to earlier was in relation to Drew's knowledge of
Senator Massicotte: So he's the expert?
Mr. Cormier: He's the expert.
Senator Massicotte: The "X" is on his forehead. If we screw up, it is
his fault, right?
Mr. Cormier: That's it, yes. I'm looking at my friend Drew. No. No,
the fact of the matter is it was in relation to his expertise where he was
saying that he feels he knows only 10 per cent of what's really out there.
Senator Massicotte: He's the expert.
Mr. Cormier: He certainly is the one who has researched it more than I
Senator Massicotte: He knows 10 per cent, and he's the one who knows
Mr. Cormier: No. He knows 10 per cent, but he may not be the one who
knows the most in the RCMP.
Senator Massicotte: I'm getting more and more nervous.
Mr. Cormier: We also have our technical operation folks who research
the technical side of it on a regular, ongoing basis.
Senator Massicotte: Do you have a wallet? Do you do transactions in
bitcoin? Do you buy your coffee and your car using bitcoin?
Mr. Kyle: I do not. I have people I'm aware of who are doing that on
my behalf at the moment.
Senator Massicotte: So you're not the expert. Other people are
experts. Is that right?
Mr. Kyle: They're physically using it, yes, and reporting back so that
I can do what I refer to as a proof to show where we can and can't leverage it,
what it can and cannot do.
Senator Massicotte: Have you tried going on the black market and using
Mr. Kyle: I'm not at that point, no.
Senator Massicotte: Have your fellows who have the wallets tried to
buy illicit goods, and so on?
Mr. Kyle: I couldn't speak to that. I'm by far not the expert on it.
We have technological people, as Mr. Cormier said, who have far surpassed me as
far as the use of it is concerned. I can speak to it from an operational use in
investigations, where it has been used and where it hasn't, that sort of thing,
and how much we're seeing of that. That's what I can speak to.
We are working towards trying to get a greater handle on it. I can tell you
that there are people who have purchased bitcoin who are holding it and moving
it around in my benefit so that I can figure it out.
Senator Massicotte: You realize we have met some of these experts. You
realize these are usually young fellows.
Mr. Kyle: Absolutely.
Senator Massicotte: Younger than us. They're pretty sharp. They are at
the forefront of technology. Boy, it is a race, effectively.
Mr. Kyle: Yes.
Senator Massicotte: I suspect you are losing the race at this point.
Maybe before we get comfortable we should hurry and catch up. They're really,
really ahead of the curve.
Mr. Cormier: That is a good statement. You are right that from a law
enforcement perspective, we know the technology is already out there, and now we
have to catch up with it, definitely.
I just wanted to clarify one point as well. I do not personally have a
digital wallet. When I said that we have digital wallets, I was referring to the
Senator Massicotte: Mr. Peirce, do you have a wallet?
Mr. Peirce: I don't have a wallet. I thought about going down to the
clock tower —
Senator Massicotte: Before this meeting?
Mr. Peirce: Exactly. This is one of the issues around bitcoin.
Senator Massicotte: Check it out. Maybe that's where the problems are.
Mr. Peirce: I understand him to be of very good character.
The RCMP and the police forces have a more challenging brief in many respects
in regard to keeping up with the technology because of the many different means
that can be used to conduct criminal activity. From the national security
context, we have very clear threat vectors that we follow, and I can say we have
a number of very talented young people, just as the RCMP does, who are very
impressive on this subject. I can say with some confidence that we do know what
we're seeing and we know what we're not seeing in regard to the use of bitcoin
in support of, for instance, terrorist activity. Because it is a more contained
field, we're able to say we're following these targets and we're seeing their
activities. We see how they travel. We see who has used currency. By the way,
money — cold, hard cash — is the most secure form of currency right now and the
hardest to trace.
Senator Massicotte: It is anonymous.
Mr. Peirce: No question. So we see when that is being used, and we
have some comfort in saying this is the degree of problem that exists, and right
now it is very limited in the national security field. What I can't tell you is
what it will be, what's the future of email and what's the future of bitcoin. I
don't know the answer to that.
The Chair: Gentlemen, you have been very helpful in your comments. You
have been very candid with your answers. Are there any questions you would have
liked us to have asked you that we didn't, or any comments you would like to
make to the committee about what we might consider in our future deliberations
and report? Are there any points you would like to make to us, particularly?
Mr. Peirce: The one point I would come back to and emphasize is a
point that Superintendent Cormier made. In terms of investigating, the biggest
challenge is the speed. You may have a lead and you want to investigate it. By
the time you get the information necessary to support the investigation into the
use of a digital currency, it may be too late. And that's where the challenge
will lie in the future as well.
Senator Massicotte: What does that mean? Does that mean you want our
report to propose you buy a bigger computer? Is that what you want?
Senator Campbell: Easier access to be able to get information.
Mr. Peirce: Faster information is the key. That's not a comment about
any particular type or kind of regulation. That's the challenge that will lie
The Chair: Gentlemen, on behalf of every member of the committee, I'd
like to express our great appreciation for your appearance today. You have been
very helpful in our deliberations. We will continue on.
Thank you to the committee. This meeting is concluded.
(The committee adjourned.)