Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 14 - Evidence - October 2, 2014
OTTAWA, Thursday, October 2, 2014
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning. Welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. Today is the tenth meeting regarding our special study on digital currency, including the potential relationships, threats and advantages of these electronic forms of exchange.
The committee has received presentations from government departments and agencies as well as academics in the fields of economic and monetary history and cryptography. The committee heard from the Bitcoin Strategy Group, the Canadian Virtual Exchange — CAVIRTEX — and BitAccess. In June, the committee also heard from Interac, PayPal and BitPay. Yesterday, we heard from two other payment companies, Visa and MasterCard.
Today, the committee returns to witnesses directly involved with one of the digital currencies, namely bitcoin. I welcome from the Bitcoin Embassy, Francis Pouliot, Director of Public Affairs. Located in Montreal, the Bitcoin Embassy is a non-profit organization that seeks to accelerate and facilitate the adoption of bitcoin.
From the Bitcoin Alliance of Canada, I welcome Stuart Hoegner, General Counsel; and Michael Perklin, Director. Mr. Hoegner specializes in legal issues related to the regulation of virtual currencies and is co-authoring with Jillian Friedman — someone I will introduce in a moment — a chapter on this subject in a forthcoming book. Mr. Perklin is a leading security and technical consultant in the crypto-currency space, including, but not limited to, bitcoin.
From the Bitcoin Foundation Canada, we have Jillian Friedman, Legal Officer; and Guillaume Babin-Tremblay, Treasurer. The mission of the Bitcoin Foundation Canada is to help people exchange ideas and resources about bitcoin more freely. Ms. Friedman is a specialist in the legal issues relating to legal currencies. Mr. Babin-Tremblay specializes in the technical aspects of virtual currencies.
Regarding the format for this morning, we will have opening remarks by Mr. Pouliot, followed by Mr. Hoegner and Mr. Perklin. Then we'll hear from Ms. Friedman and Mr. Babin-Tremblay. Mr. Pouliot has 10 minutes, I believe, and the other two groups have 10 minutes but they are going to split their time five minutes each, since each one is making a presentation.
With that, Mr. Pouliot, the floors is yours.
Francis Pouliot, Director of Public Affairs, Bitcoin Embassy: Mr. Chair and honourable senators, it is a great privilege and pleasure for me to be here. First, I would like to thank you for conducting the study and inviting the Bitcoin Embassy. I am the Public Affairs Director at the Bitcoin Embassy in Montreal, which I am representing here today, but I am also Chief Executive Officer of the Bitcoin Foundation Canada. My background is in public policy analysis and economics.
The Bitcoin Embassy is a not-for-profit organization. Inaugurated in August 2013, it is the first physical space in the world dedicated to educating the public about and encouraging the development of crypto-currency technology. Our model has been replicated by many organizations across the world.
My goal today is to speak on behalf of one of the most important stakeholders in this process: the decentralized community of users, developers and activists who participate in the bitcoin ecosystem. My interventions today will focus on bitcoin's nature as a digital money ecosystem and its social and economic benefits.
There is a global social movement at the centre of which lies bitcoin and other crypto-currencies. From programmers and mathematics, to lawyers and influential business people, the bitcoin community is animated by a sincere belief that crypto-currencies will bring about profound and positive change. Many consider the invention of crypto-currencies to be one of the most significant technological achievements since the Internet. This begs the question: What exactly is crypto-currency? For the sake of simplicity, I will focus on the most important one of all, bitcoin.
Bitcoin is first and foremost a collection of technologies that are the result of decades of research in mathematics, cryptography and distributed systems. According to renowned crypto-currency expert Andreas Antonopoulos, bitcoin can be conceived as the ingenuous combination of the following new technologies: a decentralized peer-to-peer network called the bitcoin protocol, a decentralized mathematical and deterministic currency-issuing system called distributed mining, a decentralized transaction verification system called the transaction script, and a public transaction ledger called the block chain.
Perhaps more important than understanding how these technologies work is appreciating what they allow us to achieve, which is the creation of an integrated and completely independent digital monetary and financial ecosystem that is fully functional and continuously growing. It is the largest and most significant economic experiment in living memory, and its success will have profound socio-economic consequences.
Bitcoin's most distinctive feature is that both its network and its currency are completely decentralized, meaning that they are not controlled by any individual or corporation, be it a financial institution or government agency. Another feature is that the currency and payment network elements of bitcoin are linked together by what we would call a symbiotic relationship — one cannot exist without the other. The bitcoin is at the same time the transaction network and the unit of value transmitted in that network.
In any monetary or financial system, certain tasks need to be performed in order for the system to function. These tasks include issuing a currency, preventing counterfeiting, validating transactions between users, keeping track of balance sheets and physically or digitally storing money. These tasks are today performed by an oligopoly of financial institutions, credit card companies and central banks. The ability of an individual to accumulate and transfer wealth is highly dependent upon these institutions.
Traditional financial institutions and central banks require consumers to trust them if they want to have access to financial services and use national currencies. In just the last few years, we have witnessed all over the word countless credit card frauds, bank bailouts, money supply inflation, financial censorship, arbitrary asset seizures, and privacy violations. In other words, trust is continuously being breached.
With bitcoin, the tasks mentioned above are performed collectively by participants in the network in a decentralized manner. In essence, bitcoin is a distributed consensus network that maintains a secure and trusted public ledger. The efficiency and coordination of those tasks is achieved because bitcoin's underlying technologies were designed to produce incentive structures that participants will spontaneously follow. Trust in the system is based on computation and encryption rather than restricted access. This removes the risk of misuse, abuse and system weakness that can come from centralizing control of a system into the hands of a few.
Bitcoin has interesting philosophical implications. In liberal thought, it is understood that individuals possess rights that are inherent to their very existence as opposed to being granted by governments. Bitcoin is the first practical implementation of this concept when it comes to property rights. Digital assets are stored as entries in a decentralized ledger, and only the legitimate owner has access to the assets, without relying on any third party, such as a bank.
Inside the bitcoin network, this right is inalienable and self-enforced through encryption techniques. Freedom of transaction is also absolute and irrevocable since, within the network, it is extremely difficult or practically impossible to stop a transaction from taking place.
The implications are not only philosophical. The liberating power of bitcoin comes with considerable economic benefits. The bitcoin network allows willing parties to transact instantly and directly with each other without the need for a trusted third party, from and to anywhere in the world, with minimal costs. No documentation or permit is necessary. It basically gives everyone on Earth, regardless of their status or wealth, the possibility to instantly teleport cash from one impenetrable vault to another.
By removing the need to trust a middleman in order to conclude a transaction, bitcoin removes all the economic inefficiencies or frictions related to intermediation. It makes commercial and financial activity cheaper, more convenient and safer. It allows resources previously lost in transactions to be efficiently reinvested elsewhere. For the average user, bitcoin would perform the exact same function as a credit card, albeit faster, with no risk of fraud or identity theft and without the high fees.
It is important for policy-makers to remember the technological origin of crypto-currencies. It's not simply another payment system to be studied within the conceptual framework of traditional financial services, nor is it simply a new form of money whose microeconomic properties can be studied out of context, as if it were just another foreign currency, commodity or precious metal.
Bitcoin's growing adoption must be viewed within the scope of creative destruction, the process by which new and better technologies replace their obsolete predecessor. Everyone gains from such a process, except the business models that are gradually rendered obsolete, which most likely will be the most vocal in their efforts to slow the rise of digital currencies.
In this respect, I speak uniquely of bitcoin, whose primary function is to transfer value. Other crypto-currency systems that allow self-enforcing smart contracts, decentralized autonomous corporations, and decentralized marketplaces for goods, services and financial products are currently being developed. If these technologies become functional and widely accepted, there is really no limit to the efficiency gains we can achieve.
Of course, with more freedom comes more responsibility, which is synonymous to increased risk. Bitcoin has suffered from cyberattacks, reputation damage, bankruptcies, government restrictions and incredible price swings. It was pronounced dead several times, yet it is still here and stronger than ever. This is because risks in bitcoin are assumed primarily by individual actors and not transferred to the system as a whole. The failure of one actor does not negatively affect the viability of the system. In fact, the bitcoin system loves these failures because it provides the opportunity to evolve and come out stronger. For example, the failure of MtGox, at the time the world's largest bitcoin exchange, has led to incredible security innovations and safer business models. Because of this evolutionary quality, it is perhaps unwarranted to artificially decrease these risks by regulation when innovation continues to make bitcoin safer.
To conclude, I would like to talk specifically about bitcoin and Canada. Canada is gaining a significant competitive edge compared to other jurisdictions in terms of capital investment potential and job creation in the bitcoin industry. Our country is now perceived as a bitcoin friendly world leader in the crypto-currency space. This reputation will prove to be extremely valuable as global adoption of these new technologies arises. While data is scarce and hard to obtain, we know we have the largest number of bitcoin ATMs in the world. Earlier in 2014, Canada ranked second in terms of bitcoin capital investments. Canada is a tech savvy nation with a high rate of Internet penetration and a highly skilled labour force. Canada also has the potential for competitive electricity rates, which could make it a destination for crypto-currency mining operations.
There are organized bitcoin meeting groups in almost every major Canadian city, with at least five influential bitcoin organizations. Canada has a real potential to become a global hub for the crypto-currency industry, which will attract investments and quality jobs. Tomorrow's consumer economy will depend heavily on economic interactions conducted over the Internet. We can envision a future where individuals in different countries will exchange goods and services, conduct business, and negotiate self-enforcing contracts directly using crypto-currency systems. For the foreseeable future, however, these interactions will be conducted using software and online platforms that nevertheless need to be developed and operated by people. There will be a global demand for these services, and as a nation we can only gain if these services are being developed in Canada rather than elsewhere.
Thank you for your time. I look forward to answering your questions regarding the concept of crypto-currency and the risks and benefits for the economy.
Stuart Hoegner, General Counsel, Bitcoin Alliance of Canada: Honourable senators, it's a pleasure to be here this morning to speak to you about digital currency. I'd like to thank you for your invitation to appear and thank your clerk, Ms. Reynolds, and her staff for helping me prepare.
Mr. Perklin and I have short statements to make, following which we hope to answer any questions that you have. Mr. Chair, you alluded to this earlier, but I am also providing an advance draft paper that Ms. Friedman and I wrote on the law of bitcoin in Canada to be published in the coming months in an effort to inform the committee's deliberations. We provided that to Ms. Reynolds.
As a starting observation, let me say that this committee's work is being watched with great interest by the crypto-currency community. I am aware of no other parliamentary body in the world that has publicly canvassed the breadth of materials and opinions that this committee has. Many of the questions and discussions kindled by these hearings have been excellent.
We are here on behalf of the Bitcoin Alliance of Canada. The alliance is a Canadian, federal, not-for-profit corporation dedicated to raising awareness about bitcoin among Canadian consumers, merchants and policy-makers; to promoting bitcoin adoption in Canada; and to furthering the study and research of bitcoin and other crypto-currencies.
The law can have a difficult time addressing and categorizing technology like bitcoin. Perhaps this is not surprising because bitcoin has so many features that make it truly innovative and special. In some areas of law, existing structures seem ready and able to accommodate and address bitcoin. In others, bitcoin doesn't seem to fit so well into the current rules. I want to speak to you briefly about some of these issues.
Let's consider the Budget 2014 changes in Bill C-31, which received Royal Assent this past June. The government has elected to specifically address virtual currencies through amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This was done by expressly adding ''dealing in virtual currencies, as defined by regulation'' to the definition of ''money services business.'' Representatives of the Department of Finance referred to this change when they met with you in the spring. They have given some indication about what dealing in virtual currencies means.
While this appears to be a reasonable accommodation of the usefulness of bitcoin, we are reserving judgment on these changes until we see what the new regulations say. One of the key questions bitcoin raises is, what is money? And, by this, I mean not just money as we're used to thinking about it in an everyday context, but what does the law mean when it refers to money? It sounds like a strange question, but it's a fundamental one given how much the law revolves around this thing we call money. My answer to you is that, as we conclude in the paper, legal money in Canada for many purposes likely does not include bitcoin. Certainly, the CRA and the Bank of Canada do not see bitcoin as money. It's not legal money because it's not issued by any state and is not universally accepted.
Now, one might be inclined to think, ''So what,'' but this answer has interesting implications. If bitcoin is not legal money it can't, for example, denominate a negotiable instrument under the Bills of Exchange Act. If that is true, then bitcoin-denominated instruments and bitcoins themselves may be subject to prior claims in commercial transactions.
In some cases it's not clear how current law in Canada can address bitcoin. This does not mean that bitcoin isn't brilliant or profoundly innovative. It is both of those things, and it doesn't mean that bitcoin won't find its own way of addressing these issues. It means the law is narrow and may not accommodate certain innovation that well.
The final point I want to address is in the area of anti-money laundering compliance. There is a myth that bitcoin businesses cannot be brought under the umbrella of a proper anti-money laundering and counterterrorist financing, AML/CTF, regime. While there are challenges that we face in building sound AML/CTF compliance programs for bitcoin participants, these challenges can be met and, I submit, are being met. For example, linking identity with funds and determining sources of funds can be done in this environment where called for. We believe that the challenge for law enforcement is new but not necessarily greater. I will leave it to Michael to speak about investigatory techniques in greater detail.
Thank you for your time. I look forward to your questions.
Michael Perklin, Director, Bitcoin Alliance of Canada: Thank you for inviting me here to speak to you today. As Mr. Hoegner mentioned, my comments will be made from the point of view of an investigator. Over the last 10 years, I have been employed as a digital forensic investigator. I've conducted investigations into fraud, money laundering and identity theft that were all conducted using technology, both traditional, such as cell phones and computers, and advanced, such as with computer viruses and malware designed to steal bitcoins.
My comments will address how crypto-currency technology impacts the investigative process that is applied by banks and corporations to investigate fraud, money laundering and identity theft.
The simple facts are that crypto-currencies like bitcoin can be used to launder money and as instrumentalities of crime. It's important to note that the same can be said for Canadian dollars, prepaid value cards like gift cards and every other valuable good, whether physical or digital in nature. It is up to whoever wields the tool to use it appropriately and follow applicable laws and regulations. At the same time, there are crucial differences in how crypto-currency technology operates that provide advantages for investigators to help ensure compliance with applicable laws. I would like to highlight one of the biggest differences.
While investigating money laundering cases in the past, it was common to see money withdrawn to different bank accounts across the country or internationally. In order to investigate, our team would request banking records associated with a particular account from a respondent bank, for example, the Royal Bank of Canada. Naturally these requests take time, so it was typical so see delays of two to four weeks, after which we would receive the transaction list for that one account at that one bank. After reviewing that information, we would identify transactions that involved sending or receiving funds to or from bank accounts at other banks — for example, CIBC. Investigators would then need to request the records from CIBC, only to find that those records point to yet another account, say at the Bank of Montreal.
It's worth noting that this example refers only to Canadian banks. If amounts were remitted to or received from banks in other countries, that would give rise to further issues and delays as well.
Every day across Canada, companies are devoting personnel to investigate financial crimes, money laundering and identity theft. This requires a significant amount of work by each investigator on each team in collaboration with each other and the banks.
Bitcoin, by contrast, is significantly different. Bitcoin requires every token or every set of coins to be validated to ensure that it has not been counterfeited. The protocol does this by logging every transaction and tracking every coin as it moves from address to address within the network. All of this information is stored in a single common ledger called a block chain. If a coin can be traced back through every transaction in this ledger to the coin-based transaction, or the originating transaction that created that coin, it is proven to be genuine.
These ledgers, these block chains, are readable by all. Every account number is listed as an address, and each of those account balances can be easily calculated by adding the transactions together. As a result, an investigation into the flow of money arising from any allegedly fraudulent transaction can be as simple and straightforward as reading a spreadsheet. There are no two-to four-week delays, and there is no need to reassemble transactions from multiple ledgers at separate institutions. This mechanism exposes the movement of funds to everyone and makes crypto-currencies like bitcoin some of the most easily traceable forms of value that exist.
Canadian entrepreneurs and professionals are leading some key projects in the crypto-currency space. To the extent that policy-makers wish to adopt new rules, we will continue to advocate an approach that does not stifle this innovation, that does not discriminate against crypto-currency, and that takes careful notice of crypto-currency's benefits to Canadian consumers and merchants alike. Thank you for your time, and I look forward to your questions.
The Chair: Thank you, Mr. Perklin. Ms. Friedman, please proceed.
Jillian Friedman, Legal Officer, Bitcoin Foundation Canada: Mr. Chair and honourable senators, Mr. Babin-Tremblay and I are both here as directors of the Bitcoin Foundation Canada, the BFC. On behalf of our organization, we thank you for the invitation to appear before you.
The BFC is a federal, not-for-profit corporation affiliated with the Bitcoin Foundation, a global organization headquartered in the United States. Currently, there are nine affiliated bitcoin foundations in as many countries.
The BFC is mandated to coordinate and lead efforts to protect and promote bitcoin in Canada. This includes monitoring regulatory and legislative developments, educational campaigns, and supporting maintenance and improvement to the bitcoin protocol.
I also speak to you as a member of the Quebec bar, and my remarks today will focus on consumer protection law in Quebec and digital currency, specifically bitcoin.
We can identify the applicable legal rules by looking at the function or activity in which bitcoin is being used. To quote American Judge Frank H. Easterbrook, ''the best way to learn the law applicable to specialized endeavors is to study general rules.'' Guided by that principle, it is clear that claims that bitcoin offers consumers no consumer protection at all are simply false.
The question is not so much whether consumers need to be protected, but whether they need more protection than they already have. Consumer protection laws are broad and apply to consumer contracts for goods or services where bitcoin is tendered as payment, whether the transaction is defined as barter or otherwise.
Additionally, the chapter on sale in the Civil Code of Quebec applies, mutatis mutandis, to contracts for exchange. A consumer's purchase of bitcoin from an exchange or vendor would also, in principle, be governed by these rules. What does this mean?
Consumers tendering payment in bitcoin or purchasing bitcoin enjoy implied and legal warranties under consumer protection law and the Civil Code of Quebec. Additionally, bitcoin exchange services subject to Quebec consumer law have to disclose any fees they charge to consumers, including exchange fees.
It merits mention that traditional financial service providers are also subject to this rule and must disclose fees related to currency conversion services, as was confirmed earlier this month by the Supreme Court.
Merchants must also provide instructions necessary for the protection of the consumer against risk or danger of which the consumer would otherwise be unaware. This obligation is relevant when dealing with a technology as novel and complex as bitcoin, especially since many users are still unaware of basic security precautions that need to be taken.
A key complaint about bitcoin is that the irreversibility of transactions is seen to favour the merchant over the consumer. This is considered anathema to consumer protection law, which is designed to do the opposite.
Recall, however, that consumer protection law is not beholden to chargeback technology for the protection of consumers engaging in online commerce. In Quebec, the online merchant must perform his obligation before exacting payment, unless a credit card is used. This means that if an online merchant sells goods and services for bitcoin in Quebec to Quebec consumers, he must deliver before the consumer is required to pay.
The bitcoin sector has shown great interest in building its own solutions to the problem of trust in consumer transactions. One is the use of multi-signature addresses that require multiple permissions or signatures to transmit funds from a bitcoin wallet. An escrow agent or dispute arbitrator can hold one key to a multi-signature wallet and the consumer and seller the other two.
Securities law, which is premised on protection of the investing public, is the other major area of consumer protection law where bitcoin and related technology are concerned. As is further set out in the paper submitted by Attorney Hoegner and I, bitcoin is likely not a security. Nevertheless, bitcoin or other digital assets can be used as the unit of account underlying some part of a securities transaction, whether it is a consideration for issuance or an investment fund denominated in bitcoin.
It is important to examine digital currency in the context of a broader innovation known as decentralized autonomous organization technology. Decentralized autonomous organizations, or DAOs, are software built to run on their own and mimic the operations of a corporation. The use of DAOs to raise funds, spend them and make distributions through participation of stakeholders is a highly anticipated use of this technology and has already been subject to experimentation.
An issuance of ownership units and their trade in a secondary market may engage provincial securities rules. We must acknowledge that digital currency technology is distinct from the programs and services that operate on it. Where possible, legal obligations should be based on the function performed rather than on the technology or medium used to execute it. In the spirit of competition and technological neutrality, legal treatment of digital currency should avoid favouring the use of one technology over the other.
Bitcoin is complicated and impressive, and it requires a substantial level of technological understanding. It is encouraging that the Canadian government is indeed educating itself before making any decisions on these matters.
The opportunity to share my thoughts and research with you here today has been a great honour, and I thank you.
The Chair: Thank you very much. Mr. Babin-Tremblay, please proceed.
Guillaume Babin-Tremblay, Treasurer, Bitcoin Foundation Canada: Thank you, Mr. Chair and honourable senators. It is a pleasure to present before this committee and to share some of my experiences related to digital currencies.
I currently serve as the executive director of the Bitcoin Embassy in Montreal, and I am co-founding director and the treasurer of the Bitcoin Foundation Canada. My background is in quantitative finance and financial software development, and I've spent the last 12 years providing consulting services to a number of financial institutions worldwide.
Relying on my professional expertise in quantitative analysis, I will present a number of significant indicators that are used in the measurement of various aspects of the bitcoin network. I will end my opening statement with some conclusions supported by empirical observations of these indicators, as well as by some elements of fundamental analysis and personal experience in the industry dating back to 2011.
I invite you to use the question period to seek clarification regarding my conclusions and methodology and to ask questions pertaining to the indicators themselves. I also encourage inquiries about current trends and future projections of interest to the committee.
The first category of indicators is the network indicators that yield information about the usage of the bitcoin network and help measure internal characteristics. Such indicators include self-explanatory ones like the number of transactions per day or the number of addresses currently in use, but also less obvious indicators, such as the number of bitcoin days destroyed, which represents a measure of the average age of the bitcoin being moved during a particular period.
In addition to network indicators are what I would call external indicators, which describe the relationship between the bitcoin network and the physical world as they are constrained by outside limiting factors. Examples would include the current network's hashing rate or the approximate energy consumption or amount of work collectively completed by the network so far. These indicators serve as measurement of how many resources miners are willing to expend to mine new bitcoin and to offer an alternative to only using the exchange rate in determining the acquisition cost of the bitcoin.
I also include in this category industry indicators, such as the number of wallets serviced by leading companies, the number of bitcoin ATMs per country and so on.
Finally, financial indicators relate to the interfacing between the fiat and crypto-value systems and serve to monitor the ongoing price discovery process of bitcoin. They can also be seen as synthesis indicators that explain the relationship between the network and external indicators, mapping various processes to cost and benefits incurred by using or servicing the network. Base indicators will obviously include exchange rates, trading volume and market capitalization, while technical indicators can also be applied to crypto-currencies, such as, for example, the Chaikin Oscillator to measure volatility of exchange rates, or the Money Flow Index, which will help us estimate wealth flowing in and out of the digital currency system at various price levels.
Using fundamental observations in the aforementioned indicators, I have arrived at the following conclusions: One, according to nearly all external and network indicators, the growth of the bitcoin network has been following constant linear increase over the last three years. Based on stronger-than-ever fundamentals, this trend is likely to continue.
Two, over the same period, market capitalization and exchange rates have been behaving consistently with typical exponential growth patterns associated to a growing network effect. This conclusion is consistent with Metcalfe's law, where a network's value is equivalent to the number of nodes squared, as can be demonstrated by comparing indicators used to support conclusions 1 and 2.
Three, long-term volatility and exchange rates are decreasing rapidly. Additional stabilization can be expected by the introduction of more derivatives and swap facilities and more seamless fiat to crypto conversion processes, as well as by a general increase in long-term liquidity trends.
Four, China continues to act as a main driver of bitcoin exchange rates, with Chinese exchanges providing roughly 70 per cent of the trading volume and, more often than not, leading global price movements.
Five, short-term consolidation of the cloud mining industry is expected to continue due to increasing energy hosting and cooling costs in relation to expected mining revenues, which will tend to narrow the gap between the production and purchasing costs of the bitcoin.
Six, advantages positioning Canada in crypto-currency mining on a global competitive scale cannot be ensured by relative low energy and cooling costs alone. However, a leadership position is attainable and sustainable, provided Canada maintains a light, technology-neutral fiscal and regulatory framework. This will likely secure for Canada an important early mover advantage and result in considerable investments from venture capital firms and in an overall positive economic outcome.
Seven, while the replacement of currencies by bitcoin seems an unlikely scenario, I believe it is probable that the emergence of crypto-currencies as a common payment method will put pressure on states and other leaders in the private sector to issue their own competing crypto-currencies, complementing or supplanting legacy currencies, a scenario where a number of state-issued and privately issued currencies would compete globally while being exchangeable with very low friction, which would most likely result in an optimal currency efficiency and in the first truly globally inclusive payment network in the history of humanity.
I hope these remarks prove insightful, and I welcome any comments or questions.
The Chair: Thank you to each of you. I can tell by the number of questions I have on my list here from senators that you have sparked a lot of interest.
Let me start off by asking you a question, Mr. Pouliot. I have to admit, I am very confused. I have to also admit this is not the first time, nor will it be the last.
If I go back to my opening remarks, I indicated that in the spring of this year, the committee heard from the Bitcoin Strategy Group, the bitcoin exchange CAVIRTEX and BitAccess. My recollection is that they were all basically requesting regulation: Let us get on with it; regulate us.
Now I look at your remarks, which say ''. . . it is perhaps unwarranted to artificially decrease these risks by regulation when innovation continues to make bitcoins safer.''
Could you help clarify the positions? Are you looking for regulations, or are you not looking for regulations?
Mr. Pouliot: I'm speaking on behalf of a non-profit organization. Although people involved and many of its supporters are businesses and actors in the crypto-currency space, I'm speaking for the welfare of the entire system.
It is certainly possible that certain businesses might have wanted regulations to come quickly so that they can get them over with and adjust accordingly, or it is possible that certain businesses might also want regulations for other reasons.
But as a non-profit organization who really thinks for the benefit of the system as a whole, I stand by the comments in my statement.
The Chair: I might ask the other groups: Are you looking for regulation or are you against regulation? Obviously you would have to know specifically what they are, but in principle.
Mr. Hoegner: I believe that the participants in the bitcoin ecosystem right now are regulated, and as you mentioned, Mr. Chair, the Department of Finance has indicated that new regulations are coming online dealing in virtual currencies — we don't know what that means yet — into the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Again, we don't know what those regulations say yet.
With that said, new regulation needs to be, I would submit, carefully considered, not discriminate against digital currencies, and truly acknowledge the innovative potential that this space offers and the growth it offers in this country.
We think instrumentalities of bitcoin and other crypto-currencies are currently regulated. They're going to be further regulated per the Department of Finance. New regulations, if brought online — and you will discuss that, I presume, in phase two of your deliberations — provided they respect this space and provided they are technologically neutral, would be welcome.
The Chair: Mr. Babin-Tremblay, do you have a position that you want to express?
Mr. Babin-Tremblay: I think regulation in itself is a big word. What it really means depends on who you are and what your role is in the industry. One of the most important things that I see is more about clarification rather than regulation per se.
As a bitcoin entrepreneur, one of the issues I have faced several times relates to opening a bank account, for example. Most of the banks in Canada are very wary of working with bitcoin entrepreneurs; I guess they have a compliance regime that does not include bitcoin. They don't know how to treat it. I think clarification would go a long way here to help them figure it out and see how it fits their current business model.
I believe that it's not regulation per se that is required; it is more clarification about where bitcoin falls. My colleagues here have made insightful statements as to what the situation is today.
[Translation]
Senator Hervieux-Payette: Welcome. My questions are for the representatives of Bitcoin Foundation Canada.
I must tell you that I am quite surprised. What is the Income Tax Act section that permits a foundation to be created in connection with a currency? To my knowledge, there is no foundation involving the dollar, nor any for euros. What is the purpose of your foundation? Is it a charity organization? Is it an organization whose objective is to represent the interests of the small Canadian consumer, generally? I did not understand clearly what the mission of your foundation was.
In addition, why would the government grant you non-profit organization status, with tax advantages? I have to say that this is all beyond my comprehension. I would like to know how you qualified.
[English]
Ms. Friedman: Thank you for your question. I'm happy to answer that. The Bitcoin Foundation Canada is incorporated via the Canada Not-for-profit Corporations Act, which provides that legal entities can be incorporated under this statute that serves various purposes.
Many not-for-profits incorporated under this act are also registered charities and serve more traditional public interests, like providing sports for children, for example. Not-for-profit corporations can also be incorporated under this statute that has objectives which are simply not for profit.
The objectives of this corporation are to educate the public, monitor regulatory and legislative developments and support maintenance and improvements over the bitcoin protocol. We are not actively running a business and trying to make money. That's the principal distinction. The Bitcoin Foundation Canada, while it is a not-for-profit corporation, is not a registered charity. Registered charities are entities that receive the greater tax benefits under the Income Tax Act, I believe.
[Translation]
Senator Hervieux-Payette: The fact remains that all of your foundation's money is not taxed by the federal or provincial governments. The governments will not benefit from your success.
[English]
Ms. Friedman: In principle, that's correct. I'm not a tax expert. I can't speak to the exact tax obligations of a not-for-profit corporation.
[Translation]
Senator Hervieux-Payette: Where does your income come from?
[English]
Ms. Friedman: Our revenue is from donations and membership fees.
The Chair: I have a supplementary on your question.
Senator Tannas: To try to get to the bottom of this, you don't have a charitable tax number.
Ms. Friedman: No.
Senator Tannas: You would be formed under the same statutes that the Canadian Bankers Association would be, the Insurance Bureau of Canada, the Canadian Meat Council, et cetera?
Mr. Pouliot: Yes.
The Chair: Thank you. Please continue.
[Translation]
Senator Hervieux-Payette: According to one of the witnesses we heard, China continues to drive bitcoin exchange rates. Unless I am mistaken, it seems to me that for years China has been criticized, internationally, for not evaluating its currency at its proper value.
Can you tell me how bitcoin will become an economic driver in China, to the tune of 70 per cent? According to the traditional system all countries use to value their currency, the Chinese are still far from the real value of their currency, even though they play with all of the rules of the game on the global chess board.
Can you explain to me how China can be an economic engine while not respecting, in my opinion, fairness in the valuation of its currency?
Mr. Babin-Tremblay: Essentially, we know China has one of the economies that exercises the most control over capital. For instance, a non-Chinese resident will have great difficulty taking yuans out of China. The country exercises considerable monetary control, and in my opinion, bitcoin is the solution to that problem. Bitcoin is not subject to government approval. In addition, for about a year now, the Chinese government has been issuing quite contradictory information on whether or not it authorizes the use of the bitcoin.
I think that ultimately, the people decide. People over there need other economic solutions at their disposal in order to be able to trade with the outside world. That is why bitcoin is very popular in that country. It is one way of doing transactions with other countries, of doing trade with other countries, while following other rules that are not imposed by the central government, as China does currently.
Senator Hervieux-Payette: It would not be, rather, because there is a large financial centre called Hong Kong, which is the motor behind all that, and does not like the continental policies? Would that not be the reason? They could be resorting to this to get around the Chinese government's rules.
Mr. Babin-Tremblay: That is probably one of the reasons. However, in the last figure in the brief appendix I gave you, the breakdown of the volume of bitcoin transactions is in yuans. That is really the most widely used currency for bitcoin exchanges in China. However, you raise a very good point: there are also large trades in Hong Kong and I expect that the people doing them are attempting to remove some of the pressure, and to let capital go in and out more freely. That must also be a part of the equation.
Senator Hervieux-Payette: Thank you, Mr. Chair.
[English]
Senator Tkachuk: Thank you for your presentations. You can decide who answers my questions. I have a series of them. Who uses bitcoins?
Mr. Babin-Tremblay: A lot of people.
Senator Tkachuk: I know, but is it business people, professional people?
Mr. Perklin: Bitcoin is a technology that allows immediate payment from anywhere to anywhere with little friction. That technology is useful for anyone who needs to remit payment anywhere in the world, whether it is someone standing next to them or on the other side of the globe. My answer is anyone, from companies to citizens of any country, uses bitcoin.
Senator Tkachuk: Can bitcoin operate without any regulation? Does it need regulation to operate? We hear this: Should it be regulated or not? Does it need regulation? Can we let it go? Why do we have to regulate it? If more people would use it, why do we have to regulate?
Mr. Hoegner: To directly answer your question, bitcoin could certainly survive without any regulation at all. In many markets it's lightly regulated or completely unregulated. To comport with things like anti-money laundering, counterterrorist financing rules and principles, set up by the FATF, the Financial Action Task Force, among others, it is prudent for us to have some kind of regulation, likely at the choke points, involving bitcoin. So where bitcoin goes from fiat to bitcoin or vice versa, it is an appropriate spot to at least establish some kind of oversight.
Senator Tkachuk: Will it be a value that would be designated to the bitcoin? In other words, for the purpose of money laundering, we have laws on the amount of cash that can be moved in one transaction, say $10,000 worth. If you spend over $10,000 someone has to report it. Will you have a bitcoin amount that can be sent? All of a sudden sending the money will become much more difficult, will it not? Or sending the bitcoin will become much more difficult. You won't be able to transact. You will be like the banks, individuals using ordinary currencies.
Mr. Hoegner: To answer your original question, yes. As we outline in the paper, we believe we can expect to see regulations from the Department of Finance that mirror the current thresholds established by regulation in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. At that point, we expect — we don't know yet because we haven't seen the regulations — to see various thresholds in Canadian dollars that bitcoin will be matched against and need to be valued against in order to determine various reporting and record keeping requirements.
Mr. Perklin: When it comes to transacting with large amounts, banks have to report to authorities $10,000 or more. When someone decides to transact that large an amount or more in cash, there is no reporting; it's voluntary, where the people participating in such a transaction have to let the authorities know. There's no easy way to tell if that is occurring under our noses or not.
With bitcoin, because everything uses the central block chain as its ledger, we can easily tell when large volumes of bitcoin are being transacted. So, at least in comparison to cash, which already has these problems, bitcoin doesn't have similar problems.
Ms. Friedman: On the question of whether bitcoin should be regulated, to a very large extent bitcoin already is regulated. It is subject to the principles of law; it does not exist in a legal vacuum. There's a rule of law in this country, and the people are subject to the rule of law, and our transactions are, as well. To that extent, at the very least, bitcoin is subject to the law and is regulated.
We have seen from the Department of Finance Canada and in the amendments to the federal anti-money laundering law that, as Mr. Hoegner mentioned, the choke points of risk have been identified with respect to where bitcoin perhaps needs more specific, targeted legal oversight. That's currently being done with the amendments in Bill C-31.
Senator Tkachuk: Bitcoin isn't the only crypto-currency; there are others. How many others are there? Can one crypto-currency be exchanged for another, and how is that value arrived at?
Mr. Babin-Tremblay: There are probably somewhere between 500 and 1,000 alternate crypto-currencies. New ones are being created daily, basically. There's also a number — it is very hard to come up with the exact figures — but I would say between 50 and 100 altcoin exchanges that are specialized in exchanging bitcoins with other currencies. You, as a user, create an account and deposit bitcoins there, and then you could buy some litecoins or dogecoins for your bitcoins, if you wanted.
So, yes, there are quite a few exchanges, and they all have their own rates. It is market-based.
Senator Tkachuk: Do they all take a little piece of the action as they go through, just like a regular currency exchange?
Mr. Babin-Tremblay: It is usually much less. It's usually around 0.2 per cent or something. It's actually very low in the pure digital world. There's a lot of competition, so that drives the costs down.
[Translation]
Senator Massicotte: I thank all of you for being here with us. All of this is very interesting and very important.
My question is for Mr. Perklin. Testimony we heard from several witnesses led us to wonder whether the bitcoin system is really confidential, or whether it encourages money laundering. In your presentation, you acknowledge that that risk is there with the bitcoin system, and that that is a fact. Is that indeed the case? The witnesses we have heard do not all have similar opinions on this matter.
[English]
Mr. Perklin: Could you clarify the question, please?
Senator Massicotte: There is some debate in that we are getting different testimony from witnesses. Are bitcoin transactions confidential and therefore lead to encouragement of whitewashing or basically money laundering? Is that a fact? Or can we find out and, if there's a situation, can the Financial Transactions and Reports Analysis Centre of Canada — FINTRAC — or the police find out who transacted a certain transaction?
Mr. Perklin: When it comes to using bitcoin, because every transaction flows through the block chain, anybody can see any amount of funds moving from a numbered account to another numbered account. In the United States there have already been arrests dealing with money laundering associated with the Silk Road website, which is a website used to sell illicit goods on the Internet. People who were involved with this were allegedly identified and charged. It remains to be seen whether they are guilty.
Senator Massicotte: I understand the block chain. That's how the computer program works. Can you find out the identities behind each block chain?
Mr. Perklin: It is possible to identify who owns a specific account, using a variety of investigative techniques. Some examples include the IP address that was used to broadcast a transaction — if it's associated with a home, a business or some other —
Senator Massicotte: Therefore, it's erroneous when people say it's confidential.
Mr. Perklin: Bitcoin is definitely not confidential.
Senator Massicotte: I appreciate that, but the identity is not confidential? I know the whole transaction is visible, but the people behind the transaction are not confidential.
Mr. Perklin: It will take a bit of work to identify them, but the amount of work is not insurmountable. If anything, comparing it to traditional digital forensic techniques that I have employed at my previous employers, it is not any more difficult than what we had to do there.
Senator Massicotte: Therefore, if the mafia world is listening to us, they should stop right now, because they're being exposed.
Mr. Perklin: If you are committing a crime using any technology, there are ways to identify you, yes.
Senator Massicotte: Can I ask one more question?
The Chair: Please.
Senator Massicotte: Mr. Hoegner, you propose that there is a need for greater regulation to at least equate it with what FINTRAC requires of another currency. Some countries are discussing this. Is the choke point to get better identity the merchant who mines the currency? Is that the choke point? Or do you need to find out more? You can't open a bank account because people are suspicious; people are scared there's dirty money being laundered. Is the resolution the miner?
Mr. Hoegner: The resolution was enacted and received Royal Assent this past June. It is dealing in virtual currencies, as defined by regulation — and, again, we don't know yet what that means. That's going to be the choke point, and it includes these dealers in the scope of the ''money services business'' definition. Will that include miners? I have my doubts. But in any event, it appears that the Department of Finance Canada is saying that's their choke point and that's their line in the sand where they will regulate this industry.
Senator Massicotte: Will that resolve your issue dealing with banks?
Mr. Hoegner: That's a question for the banks.
Senator Massicotte: Because they're free to do whatever they want.
Mr. Hoegner: Whether they have regulatory certainty in this country or not, they are free to accept or decline as customers whomever they wish.
[Translation]
Senator Bellemare: It was very interesting to listen to all of you. I expected to see people arrive here in jeans, but I see that the bitcoin community could well pass for the banking community.
After everything we heard here, at the committee, I have come to the conclusion that bitcoin and all of the digital currencies are here to stay. It is a paradigm shift that is a bit difficult to understand and to examine properly.
Mr. Pouliot may be able to answer my first question. You suggest that there should not be too much regulation, overall, because that would prevent you from innovating further. We understand that, since regulation can kill innovation. However the bitcoin is a little bit like Hygrade sausages. I do not want to give free publicity to any sausage, but they say the more you eat, the fresher it is; and similarly the more people use bitcoin, the better known it becomes, and the more it grows.
Mr. Pouliot, you said that there are risks in using bitcoins, but you perceive them as being a positive element, and the risks are assumed by individuals. Personally, I see that as a negative element which may prevent the spread of bitcoin. Could the bitcoin community independently create some group risk insurance, and if so, how much would it cost?
Mr. Pouliot: That is a really excellent question. It is important to understand that we are still in the very preliminary stages of bitcoin and digital currencies. They are not very easy to use, nor very intuitive. There are a lot of additional responsibilities that consumers are not used to yet. Having control over one's money is to protect it, to be careful where you invest it and how you use it. This is not a common concern when it comes to bank accounts, where deposits are insured. That mentality is going to evolve gradually and people are going to become increasingly responsible.
In addition, there are a whole range of services that can protect bitcoins. There are some really fantastic innovations. Ms. Friedman mentioned the multi-signature addresses. These are bitcoin wallets that require two signatures out of three in order for the bitcoins to be moved. So you cannot lose them accidentally. Unless two persons out of three are malicious, they cannot be stolen.
I think we simply have to let things evolve a bit over time. These are really early days yet. We could say that we are where the Internet was in the beginning of the 1990s.
Senator Bellemare: Let us take the example of a young person who leaves on a trip to go all over the world. There are bitcoin machines all over the place. Let us suppose that that young person loses his or her credit cards. He cannot use his iPhone to look for bitcoins. The task is more complicated. Unlike the ads for credit cards where someone loses everything and is in the desert with his card, nothing will be replaced. Can bitcoin do that?
Mr. Babin-Tremblay: Yes, quite so. I had that problem. I found myself in a situation where I did not have my wallet and I had to pay for something. Fortunately, the person I had to pay knew about bitcoin. And so I was able to pay with my bitcoins directly.
Senator Bellemare: With your iPhone?
Mr. Babin-Tremblay: I have an Android, but the principle is the same.
Senator Bellemare: A smart phone.
Mr. Babin-Tremblay: Certain companies have begun to offer bitcoin wallets that are insured. For instance, Lloyds of London created a partnership with a European company to insure the deposits of people who deposit their bitcoins there. Other technologies are being developed. There are several innovations in this regard, in particular the ''provable solvency'' which is a way, when bitcoins are used in a transaction, of demonstrating at any time that one does indeed own the reserves one claims to own. This is impossible in the traditional system. Currently, in order to do that, a bank would have to resort to using the services of a company like Ernst & Young to verify the books and confirm that the money is there. When using bitcoins, this can be done directly without the services of an external auditor, using a mechanism known as ''provable solvency.''
As Mr. Pouliot was saying, such innovations are still in their very preliminary stages. We will have to wait a few years before they are put on the market. However, the bitcoin industry is already there.
Senator Bellemare: How many transactions can be done before a bitcoin dies? Is there a limited number of transactions that can be done?
Mr. Babin-Tremblay: No. What you are referring to, the ''bitcoin days destroyed'' is the number of days during which the bitcoins stayed in a wallet before being moved. If I have not moved the bitcoins from my wallet for a year and I move 100, there will be an indication of 100 times 365 days. That is the number of days which were destroyed. This measure is important to determine what is going on with the ''early adoptors,'' that is to say, what the people who were there in the beginning are doing with their bitcoins.
Let us take the interesting example of what happened a few days before the collapse of the Mt. Gox exchange in February. You have a graphic representation of this in figure 7. You can see there were a lot of spikes in the ''bitcoin days destroyed'' number. The investigation is still ongoing, and so we do not know all of the details. What was mentioned in a document which was leaked on the Internet is that in order to try to reduce its liabilities, Mt. Gox had decided to sell bitcoins on other exchanges that did not belong to them — and here I am talking about clients' bitcoins. This move was in a way announced by the number of ''bitcoin days destroyed.'' Observers noted the number of bitcoin days destroyed and suspected that there was something fishy going on. A few days later, indeed, the value of bitcoin decreased considerably following the sale of those bitcoins.
So that measure is an indication of what is going on among those who have held bitcoins for a long time.
Senator Bellemare: So, a bitcoin cannot die in the way that a coin can get used.
Mr. Babin-Tremblay: In fact, you may lose the private key. If I have the only copy of a private key and lose it, those bitcoins are lost forever.
[English]
Senator Ringuette: Maybe my first question will be naive, but I think we have to come to a mutual understanding in regard to the name that we attach to this currency, because this committee is studying digital currency. Mr. Babin-Tremblay, you're talking in your document of both digital currency and crypto-currency, and Mr. Pouliot, you're also talking about virtual currency. I think that is one of the issues of public clarification that has to come forth in regard to the phenomenon or the trend. From your perspective, what would be the adequate currency name that we should all adopt?
Mr. Perklin: Each name — virtual currency or digital currency or crypto-currency — is used synonymously, even though they have subtly different meanings. A virtual currency is a currency that doesn't exist in your hand. It's more of a ledger-based currency, like a credit card or all of our funds in our bank accounts. That's a virtual currency. We read the number in the ledger when we log into our online banking, but we're not actually holding it.
A digital currency is a currency that exists only digitally. In this case, a virtual currency is the same thing as a digital currency. It's a number written in my RBC bank account. A crypto-currency is distinct. A crypto-currency is a currency based on cryptography, on the laws of mathematics.
Senator Ringuette: So we are not studying the correct trend? We should be studying crypto-currency?
Mr. Perklin: A crypto-currency is an example of a digital currency and a virtual currency. If you were to draw a Venn diagram, there are virtual currencies, which is large, digital currency, which is inside virtual currencies, and crypto-currencies, which is inside of that. They're used synonymously when talking about bitcoin, which is the most common crypto-currency.
Senator Ringuette: That brings me to the other questions of regulation, for instance in the last budget implementation bill, if we referred to digital currency, because how you name a product, however it's created, is very important in cases of regulation and legislation.
Mr. Hoegner: It's an excellent question. Bill C-31 refers to virtual currencies. You might think that would be a problem because one of the examples given by the government in strengthening their anti-money laundering and counterterrorism financing rules was the example of bitcoin.
However, those are to be defined by regulation, so the government is free to define virtual currency however it wishes. It might be an anomaly that it would be defined for the purposes of that law — for purposes of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act — as decentralized more in the way of a crypto-currency, decentralized, exchangeable, protected by cryptography and mathematically based. That's certainly possible. They might change. Again, we won't know until the regulations come out, so they might be able to work within that framework.
Senator Ringuette: A definition of a new word in a piece of legislation is always part of; it is not done afterward. I hope the Department of Finance is listening to us so they can clarify the issue.
Your presentations were excellent, by the way. Mr. Pouliot, in your presentation you said that bitcoin does not need any banking system or authority. Yet, Mr. Babin-Tremblay, you said you had asked to open a bank account with our current structure of banks, and you were denied. Where should we be going?
Mr. Pouliot: That's a good question. It's important to differentiate between the technological layer of bitcoin and its real-world applications. Bitcoin can be conceived as a network of computers talking to each other. I can send one bitcoin from one computer to another. There is no problem. If everyone accepted bitcoins for things at the depanneur and gas at the gas station, we would all stay within the bitcoin network.
The bitcoin network is not large enough for an individual to be sustainable living and working in Montreal. Bitcoin is not at the stage where it is 100 per cent sustainable; so we need to have bank accounts and have access to credit cards and finance, but bitcoin, as a system, is completely independent from the banking system. Individual participants in the network are also individual participants in the real world.
Ms. Friedman: If I can give an example where this friction with the traditional banking system exists, imagine you want to set up a business that operates a service using bitcoin or some other digital currency or crypto-currency. You hire employees; you need to pay your employees. They want payment in Canadian dollars. You need to have a bank account to pay them.
For many businesses that want to get into this industry, the inability to open a bank account is a huge barrier, even where these businesses aren't necessarily operating exchanges, that is, they're not in the business of buying and selling bitcoin. They're doing an ancillary service using this technology.
That's very troublesome because it is a real barrier for the growth of this industry. There is not much that these businesses can do because, as Senator Massicotte mentioned, banks are not beholden to anyone with respect to whom they decide to open accounts for, and they have their own protocols they need to follow. With this technology that they frankly don't understand or are ambivalent towards, there seems to be a real problem in that respect.
Mr. Perklin: My primary business is a security consulting business. I provide an hourly rate to my customers, and I advise them on crypto-currencies to secure them, and I perform audits of digital exchanges.
I've tried opening up a bank account on behalf of my company with three major banks here in Canada. All three of them denied me a bank account based solely on the name of my company — Bitcoinsultants. Because I had ''bitcoin'' in my name, they refused to allow me to have a bank account because they were fearful I was dealing with crypto-currency.
When we bill our clients, we accept bitcoin. Thankfully, my lawyer accepts bitcoin, as do some of my vendors. Most of my staff accepts their salary in bitcoin; however, those that don't I have to exchange for cash, and now from a safety perspective, I'm holding sums of cash that I have to hand out to my employees. This is unfortunately what we need to do as bitcoin businesses that are unable to open a bank account, despite our not dealing as a bitcoin exchange.
Senator Ringuette: Since the chartered banks in Canada do not want to provide this service, from my perspective, there are two other alternatives that could be looked at. One would be for the Bank of Canada to start to play a role in the crypto-currency. Second, we also have an entity in Canada that has a bank charter and is in need of financial revenue, and it's called Canada Post.
How would you respond to these options?
Mr. Pouliot: I hope it's just a matter of time before enough people and businesses use crypto-currencies that banks simply cannot afford not to have these people as clients. It might be a problem that will just solve itself in a short while.
It's not clear why it's so difficult, why banks are so fearful. It might be regulatory uncertainty or internal policies or miscommunications. I'm hopeful it will be resolved in a short while.
Mr. Babin-Tremblay: It's interesting that you mention Canada Post, because a couple of months ago there was an investigation by the U.S. postal service into whether or not they should be getting into the sale of bitcoin.
Down the road, banks will see the value in bitcoin. As a matter of fact, they already do. I met with high-level executives of some banks in Canada, and I was impressed and surprised that they knew so much about bitcoin and were so interested in it. Down the road there will be a lot of room for these players to enter the field.
Right now it's a matter of uncertainty, from what they told me; they don't know what to expect. That's why I mentioned that clarification is very important. As long as we define where bitcoin falls and how it should be treated, eventually banks will be interested in providing services like that.
There are a few examples of banks worldwide — I think there is one in Germany and a few in the U.S. — that started offering bitcoin or other crypto-currency-related services. As one example, last week two American banks announced they would become Ripple gateways. Ripple is another payment system based on cryptography. It was basically two banks that were implementing their software to be part of the Ripple network.
Traction is starting. There is some interest for sure, but there are a lot of questions that need to be answered first.
Senator Black: I would like to join with my colleagues in thanking and congratulating each of you for these outstanding presentations. I have only been at the Senate a year and a half, but this is clearly one of the best panels I have had the privilege of working with.
Speaking for myself, I view my role on this file as to assist, in a meaningful way, innovation, as you have discussed today. That's how I'm trying to look at this. How do we assist this innovative technology, this disruptive technology, as you referred to? You have to help me. We had a lot of conversation today started by our chairman around regulation or not.
I would need specifics. What would you like this committee to do to assist the development of this, right to the point? What would you like us to do? Maybe the answer is nothing, and if that's the answer, tell us. But if there is something that you need to do to enhance Canada's position as a destination for innovation, I want to know that. Let's cut right to the chase: Tell us what you need from us.
Mr. Perklin: I'll start. I'm sure each one of my colleagues will have comments.
One of the things that would be beneficial to the innovation that my company is trying to provide to Canadians is the ability to open a bank account. When I am accepting funds from my customers in exchange for my services, I want to accept a cheque, but I cannot accept a cheque because my company has no bank account. I'm unable to do that. At the end of my tax year, when it comes time to remit payment to the government, I have no ability to write a cheque to give the Canadian government the money they deserve for the business I've conducted here in Canada. Instead, I have to have one of my employees write a cheque to the government on behalf of my company, and then I can reimburse them with bitcoin, because we cannot accept funds in any other way than cash.
To answer your question specifically, Senator Black, one I thing I would love to see is the ability for bitcoin businesses in Canada to open bank accounts at our major banks.
Mr. Hoegner: I think we would very much appreciate the focus and ability of the crypto-currency ecosystem to focus on arriving at its own solutions and to see how this plays out in at least the short to medium term. Bearing in mind the changes that have been made in Bill C-31 and in the regulations that are forthcoming, I would love to see this committee understand what crypto-currency is, really get its arms around what crypto-currency is, and not necessarily make any policy changes at this point.
Mr. Babin-Tremblay: One outstanding issue is the taxation classification of bitcoin. The CRA classified it, I think, as a non-appreciating capital asset. Obviously, with Bill C-31, it's being included in the proceeds of money laundering and whatever the name of that thing is. You guys know.
One of the key dangers here that we have to avoid is coming up with some sort of double taxation scheme for bitcoin. If you treat it as a commodity, as for capital gains purposes, you cannot also charge sales tax and treat it also like a currency. That is one of the main outstanding issues that need to be resolved: In which category does it fall for taxation purposes? I am sure Jillian has suggestions here, but from an entrepreneur, that's one of the important outstanding issues that need to be cleared.
Ms. Friedman: I think Mr. Hoegner spelled out very well what I would have said as an answer. I would add approach this questioning in the spirit of competition between different technologies and institutions that provide financial services and in a way that is as technology-neutral as possible.
If you look at different services being provided, it wouldn't be fair to say that an exchange that has the same risk of money laundering, for example, changing from euros to Canadian dollars, has to follow this set of rules, but an exchange using digital currency to Canadian dollars doesn't have to follow this set of rules. If the risk is the same and they are providing a similar function, then by virtue of the idea of technological neutrality, it should be legislated similarly.
Mr. Babin-Tremblay: It would be the opposite road to take than what they have been doing in New York. In New York, Benjamin Lawsky, Superintendent of Financial Services, came up with a proposal for bit licences, which was negatively received by the bitcoin industry for a number of reasons, most of them being that they are not technology-neutral. They are imposing additional requirements on bitcoin companies to comply with. That will most likely result in the isolation of New York and businesses moving out of the state of New York into friendlier jurisdiction, because it is impossible to comply from a technical perspective.
Mr. Pouliot: The important key point is not to discriminate against bitcoin just because it is a different technology, to look at it from the functions and uses of what people are doing with the bitcoins.
The community doesn't ask for much; I think I speak on behalf of most of the community when we say that we're not particularly inclined to go to government for extra help. But, for instance, some ministers in the U.K. have made positive statements regarding bitcoin. I'm speaking particularly of the U.K. where the minister of finance announced that he believed the U.K. could become a bitcoin hub. The community is receptive to government statements about bitcoin, so I think positive statements from our governments saying they think it's a great innovation — and Canada does actually have a great potential in bitcoin — just stating that fact, the symbolism of it, is enough.
Senator Tannas: Mr. Babin-Tremblay, you mentioned mining costs versus purchase costs. Could you give us, in Canadian dollars, in whatever denomination of coin you want to talk about, what mining costs are versus purchase costs at the moment?
Mr. Babin-Tremblay: Mining costs will vary between different organizations, different mining setups. It's becoming extremely competitive, especially with the rates now lower than they were a couple of months ago.
Approximately, the cost of mining a bitcoin is around US$310 as of now, and the cost of acquiring bitcoin on exchange is about $385 today, so there is a significant gap, but it's getting much smaller than what it used to be. Just a couple of months ago, the cost of mining bitcoin was lower than $300, and you could only buy it on exchanges for $900 or $1,000. It's getting significantly narrower, and also a lot of consolidation is happening in the mining space where you see bigger hosting companies starting to offer cloud mining services. Instead of having lots of different people having their own machines in their basement, they're bunching together, installing them into huge data centres to benefit from economies of scale.
There is still a way to go before we reach equilibrium in the production costs and the purchasing costs of bitcoin, but it's getting there. The current technology used to mine bitcoin is called ASIC, for ''application specific integrated circuit.'' Before that, people were using GPUs, graphic cards, to mine bitcoin. At some point, the price went down to $2, and the electricity cost of mining these bitcoins was in the same range, so at some point people started to unplug their miners because it was no longer profitable to mine the bitcoins.
I don't know if this will happen this time because the dynamic is different with data centres. Usually, it's longer-term contracts, so it doesn't make sense to shut down your machines, even if you are losing a little money mining. You already have the space, you have to pay for it and it's your biggest expense. It makes sense to keep mining even if you are losing a little money. You will lose less than if you stop mining completely.
Senator Tannas: I know this will be a guess, Mr. Perklin, but you're accepting bitcoin in exchange for consulting about bitcoin. It's kind of inside baseball activity, and there are all the speculative purchases, like Senator Gerstein who bought it and hasn't spent it.
Senator Tkachuk: He doesn't know how.
Senator Tannas: What percentage of the transactions that are occurring are genuinely exchanges of the currency for something of value that is needed by somebody to live their everyday life?
Mr. Perklin: That's a great question. As a small correction, my company, Bitcoinsultants, provides bitcoin consultant services. While that does engage in bitcoin security, it is any kind of security.
Was your other question about what percentage is required to live off of bitcoin?
Senator Tannas: At this stage, are we all just trading bitcoins like baseball cards, and so on, versus how much represents transactions to purchase something of value that we need.
Mr. Perklin: That depends on the vendors that your company chooses. For example, with my company, there are certain costs where we have to remit in dollars and not in bitcoins. If I were to estimate, maybe about 35 per cent to 40 per cent of the money that we spend needs to be converted to dollars in order to remit to our vendors. Whereas the vast majority which covers dollars going to our staff for the work that they complete, dollars going to our accountant and to our legal fees, is all staying in bitcoin only because the vendors we have chosen choose to accept that as an additional medium. It depends on the vendors that you choose.
Senator Tannas: I understand. I'm looking for a macro answer. The whole bitcoin world —
Mr. Babin-Tremblay: It is hard to come up with a number because we don't know everyone who is using bitcoin and what they're using it for. A number of high-profile companies have started to accept bitcoin in the last year. Notable examples include Overstock, Expedia, TigerDirect and Bell, for example. Basically, they all reported higher-than-expected crypto-currency purchases from their users, that is, from their clients.
It started with a much more speculative environment. People were buying it for what the future could bring, but nowadays, you are starting to see people using it for real purposes to buy things, to buy goods and services, just like they can. In Montreal, for example, quite a few lawyers and accounting firms will accept bitcoin. The Bitcoin Embassy and the Bitcoin Foundation Canada have been using these resources and paying them in bitcoin to provide professional services.
It is going to grow from here. A major milestone will be reached when you can pay for gasoline or food at most convenience stores or grocery stores with bitcoin. There are some initiatives already. A few companies have come up with a coin-for-fuel gift card that you can buy with bitcoin and use at the pump to pay for your gas.
This will increase over time. There is a big speculative component to the whole thing, and we're still at the very early stages. There's a lot of upside remaining. However, at the same time, we are starting to see more and more useful uses for crypto-currencies.
Mr. Perklin: There is one innovative service provided by a Canadian company based out of Montreal that allows you to pay any service that exists as a payee within your online banking, for example, a credit card. Using a service such as this, you can buy anything with your credit card and then pay off your credit card with bitcoins directly.
With services like this, maybe 95 per cent, if not more, of any purchase that you make can all be paid with bitcoin today.
The Chair: That concludes round one of our questions. We have just over 20 minutes left, and we have no shortage of people on the list for round two.
Senator Tkachuk: One of my questions is a follow-up to Senator Bellemare's question about how many users it can support. If you are mining the bitcoins, is there a time when the demand will be great and, therefore, the miners may not be able to keep up? How will the expansion of that money supply work?
Mr. Babin-Tremblay: The money supply of bitcoin is set in stone. It will be 21 million units. However, these units can be divided up to eight digits after the small separator. The market rate, the exchange rate, will serve as the buffer for adoption. Essentially, there won't be more bitcoins in circulation. However, you can divide one bitcoin into smaller units, and these units become more valuable the higher the numbers of people there are using the network.
The way the network will expand with new users will most likely be with the price going up. More users obviously means a smaller share of the pie. One of the interesting charts that I prepared is the first one, Figure 1, Metcalfe's law. Essentially, it states that a network's value is proportional to the square of its number of users.
In this case, we can see almost a perfect correlation between the exchange rate and the daily transactions and unique addresses used, which is the best way to determine the number of users. We can see that they're matching very closely. The more users, the more addresses being used, the more transactions happening, the higher the likelihood of the price following, too.
Senator Tkachuk: I don't know who mentioned the amount of ATMs in Canada, but how many ATMs do we have that supply bitcoins in Canada?
Mr. Pouliot: Unfortunately, I don't have the specific number. I will go with what I know. In Montreal — and Guillaume, correct me if I'm wrong — around eight; in Toronto, with the ones recently installed, do you know?
Mr. Perklin: I believe it is about 10.
Mr. Pouliot: In Ottawa there's four, maybe.
Senator Tkachuk: I know there's one for sure.
Mr. Pouliot: Yes. They're really all over the place. Vancouver has a lot of them, as do Calgary, Halifax and North Bay — a lot of cities.
Senator Tkachuk: When you open a bitcoin account, you are saying because your company has the name bitcoin in it, the bank won't allow you to open an account using that name. You could use another name, though, but how would your account be kept? Is it kept in bitcoins or in Canadian currency?
Mr. Perklin: When I was trying to open up a bank account, I was specifically trying to open a Canadian bank account. When I was filling out the forms and the bank officer saw the name of my company, before I was even finished the form, he stopped me and said, ''Sorry, sir. You can't open up a bank account here.'' They told me they had received an e-mail from head office — it was apparently a blast e-mail that all bank employees received — that said do not open any bank accounts for bitcoin companies, any company that accepts, remits, transmits or converts bitcoins. They refused to open up any bank account. I felt that was discriminatory, but it is their bank and they can choose their customers.
Senator Massicotte: I have two concerns for your future. One is taxation. You mentioned not only income tax but also, the way they're coming down at you, tax on any variance. The second thing is the sales tax.
Let me jump to the other issue, timing. When you use your card at a corner store and you are trying to pay for a pack of gum, I understand there's a six- or eight-minute delay if the merchant wants to confirm payment. Can that be reduced? That's a long time.
Mr. Perklin: There is a difference between transmitting the payment and having the payment recorded in the block chain. When I transmit payment, anybody can see the payment instantly. They can see that Michael just attempted to give a payment to Senator Massicotte. However, in order for it to be written into the ledger book, that is what can vary, anywhere between 30 seconds and one hour.
Regardless of its being recorded in the ledger book, I know the payment has been rendered because I can see and detect the transmission on the network. It's no different than buying a pack of gum, which is very low value. It takes two seconds: Here is some change, here is the gum. If you're buying a car or a home, a significantly longer time is required in order to make sure that those funds are going through.
Senator Massicotte: The problem, though, is that when you go to a depanneur — I can appreciate you see a transaction, but unless you know the customer, you want to wait for payment. It is like writing a cheque: You want to make sure it gets cleared. Won't that be a limiting factor or —
Mr. Perklin: Not for small transactions. If it's for a pack of gum or a coffee, there's very low risk. If it's a car or a home, now you want to make sure that every T is crossed and every I is dotted. You have the time to wait for the hour of confirmation necessary.
Mr. Babin-Tremblay: The confirmation time, just like Mr. Perklin said, is when the transaction is recorded in the block chain. But since everyone sees it right from the moment everything has been transmitted, you already know that payment has been made.
The reason we use a confirmation mechanism here is to discourage some types of attacks that could be made against the bitcoin network. One of them is the double-spending attack, which is probably the most important we're trying to mitigate here. The double-spending attack essentially means that I'm sending you money and then I'm trying to roll back the transaction to spend it again.
That's the reason why we have confirmations. The higher the number of confirmations, the higher the cost of performing a successful double-spending attack. It means someone has to have a lot of mining equipment to try to outrun the main block chain on the network; come up with their own version of the block chain; spend money; then publish their own version of the block chain, reverting in the process all the transactions that occurred since then.
The costs of doing this are prohibitive.
If you are going to buy a pack of gum or a bottle of Coke, you won't spend the hundreds of thousands or millions of dollars it requires to perform such an attack. It's really a risk mitigation concept, where you really want to put in perspective the amount you are transacting. If you're telling me you're going to send me $100 million in bitcoins, I'm going to wait for my six confirmations. If it's a pack of gum, no big deal.
[Translation]
Senator Bellemare: Mr. Babin-Tremblay, you are an economist, is that right?
Mr. Babin-Tremblay: I work in the area of quantitative finance.
Senator Bellemare: I simply want to discuss a point concerning the bitcoin monetary mass again. There is a classic formula in economics: MV=PQ; the monetary mass multiplied by its velocity equals the price plus the quantities produced. In the case of the Bank of Canada, regarding the fiduciary money printed by a bank, when monetary mass is increased, interest rates can then be adjusted.
That being said, when bitcoins are made, there is no impact on the cost of credit, but there can be an impact on the value of the bitcoin. You said that there are 21 million bitcoins; so the value will tend to increase. However, we must also consider the ''V'' for their velocity.
Mr. Babin-Tremblay: Yes.
Senator Bellemare: Since the bitcoin does not die, the velocity is there and may increase.
Mr. Babin-Tremblay: Yes, that is a fact.
Senator Bellemare: What is the value of the transactions that could be made with 21 million bitcoins? You have not calculated that yet?
Mr. Babin-Tremblay: That is what I attempted to represent in figure 1. The daily transactions are those that take place every day on the average. There are approximately 80,000 transactions a day as we speak. This is quite a marked increase; there has been a linear increase since the beginning when the bitcoin network was created.
In 2011, there were close to 5,000 transactions a day and now there are about 80,000. So there is clearly a relationship between the two.
The velocity has a direct influence on the price. You have to acquire bitcoins in order to be able to exchange them. Of course, if I want to make transactions using bitcoins, I would have to get them somewhere.
Senator Bellemare: When bitcoins are created, it is not in the context of transactions like those?
Mr. Babin-Tremblay: They are mined.
Senator Bellemare: So that influences the value of the bitcoin and the costs of production.
Mr. Babin-Tremblay: Yes and no. The algorithm is designed so that if the number of persons mining bitcoins diminishes, the difficulty of the network also declines. So, it is an algorithm that adjusts to produce one block every 10 minutes approximately. There is a reward associated with the production of that block. At this time, we are talking about 25 bitcoins per block and that number decreases by half about every four years. There is no factor that would allow us to freeze mining in time. It will always be linked to the size of the network, in light of production.
Senator Bellemare: My last question concerns China. In China, there are a lot of people and a lot of transactions. You said that the Chinese use bitcoins; do they use them for transactions amongst themselves in yuans, or for international trade?
We know that the bitcoin is practical for international transactions, but do international traders such as the Germans want to acquire yuans? How does it work in China?
Mr. Babin-Tremblay: It is difficult to get a picture of what is going on. We have to be on the ground in order to observe it first-hand. However, we can suppose that one of the reasons why the bitcoin is used a lot in China is precisely to facilitate movement of capital outside of the country; this is very strictly controlled by the Chinese government. That would seem to be one of the first reasons why people would want to use bitcoin and why it is so popular in China. China still has a Communist government that is quite authoritarian. I think this is a response to the practices of that government. People use the bitcoin in order to evade some of the government practices that could be considered abusive.
Senator Bellemare: That is a political statement.
Mr. Babin-Tremblay: In a way.
Senator Ringuette: My question will be very brief and follows upon Senator Black's question concerning your expectations and our recommendations. Should we recommend to the Receiver General of Canada that he accept bitcoins as payment for the GST and for personal and corporate income tax?
[English]
Ms. Friedman: Do you know if there's another jurisdiction that does that? Has that been done before?
Mr. Pouliot: I don't think so.
Ms. Friedman: There is one.
Mr. Perklin: Yes, there is. The name of the city in the United States escapes me, but they allow municipal taxes to be paid in bitcoin, and they pay the salary of their chief of police in bitcoin. I apologize I don't know the name of the city.
The Chair: I'm sure the committee would be delighted if you would find it and send it to the committee clerk. We will be waiting with baited breath.
Mr. Perklin: I will.
One quick point, because I think there was a miscommunication earlier. Senator Bellemare, there are not currently 21 million bitcoins in circulation; there are only 13.3 million.
Senator Tannas: I wanted to come back to something. Did any of you ever get a reason from the banks as to why they would not open an account? Was it because of anti-money laundering and antiterrorist financing, and they just can't see into your business and understand it? They're ultimately the front lines for AML/ATF. If you're doing something wrong, they're the ones who go to jail over it.
Is that their excuse, if you will?
Mr. Hoegner: There's been a paucity of specifics that have been forthcoming from the banks about why they are hesitant to engage with actors in this sector. Ultimately, it will be a question for the banks. They have put forward concerns about sources of funds and linking funds with identity.
I can tell you two things: One is that those problems, while real, are manageable and can be addressed; and I can also tell you that international banks are willing to take on this business.
Bearing those facts in mind, that would be an interesting question to ask the banks.
Senator Tannas: You are entrepreneurs. Has anybody thought of a credit union for bitcoin people?
Mr. Hoegner: That's been explored, and some of the bigger ones, to be fair, will not take any money services businesses. They're not discriminating against bitcoin; they're just discriminating against all MSBs.
Senator Tannas: What about your own credit union for bitcoin users?
Mr. Babin-Tremblay: It's something that has been discussed in bitcoin circles. To add two other reasons we were given for the banks not taking bitcoin companies, there's also the reputational risk. Some of them mentioned it was direct competition. Although I believe it is not direct competition, that was mentioned.
Ms. Friedman: If I could add to that, it will be interesting to see once the regulations come out and come into force. It will be very clear to banks what the requirements of businesses dealing in digital currency are. Once those obligations are clear, and digital currency businesses follow exactly the same rules in complete conformity as other MSBs, it may get interesting to see whether or not banks will be prepared to take on these clients.
When the anti-money laundering legislation came out originally and created this section for MSBs, banks also shut down the bank accounts of traditional money service businesses. That was a growing-period adjustment, with banks trying to determine how to mitigate their own risks. Perhaps right now it is fair to give them the benefit of the doubt in that respect. It will be interesting to see once everything is set out a little more clearly.
To answer your question about the credit union, I would answer that with another question. It would be very interesting to explore that in Canada where the business of banking is by and large subject to the Bank Act, which has high capital requirements amongst other very onerous obligations to put forth a traditional financial institution like a bank. That might actually be a very big barrier to the establishment of a bank that does crypto-currency in Canada.
The Chair: To each member of our panel, from each member of the committee, I would like to extend our great appreciation for your appearance today. You have been an absolutely outstanding panel. We are greatly appreciative.
Before we conclude, in Mr. Pouliot's opening statement he referred to ''renowned crypto-currency expert Andreas Antonopoulos.'' I wanted you to know he will be our witness next Wednesday. It should provide a most interesting time.
This meeting is concluded.
(The committee adjourned.)