Digital Currency: You Can’t Flip This Coin!

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The Report

Executive Summary

The Minister of Finance often asks the Standing Senate Committee on Banking, Trade and Commerce to undertake studies that might be helpful for government policy-making. This was the case when the late Jim Flaherty asked us to study cryptocurrency. Committee members had only a vague idea of what the Minister was talking about. We had no choice but to start at the beginning, with the essential question:

What is cryptocurrency?

The answer is complicated. The passionate and optimistic witnesses we heard from described a genuinely new technology. One that may well usher in a world where money flows as freely as data flows over the Internet; where there are no intermediaries (such as a bank) between you and your transaction, and where the 2.5 billion unbanked people in the world can potentially enjoy access to financial services.

While the Committee gave itself a broad mandate to study “digital currencies” in general, most witnesses discussed the subcategory of cryptocurrencies.

Cryptocurrencies belong to a nascent industry that has brought with it an entirely new vocabulary. In this report we provide a glossary of terms and technical descriptions of what cryptocurrencies are and how they work.

For this executive summary, the Committee will keep it simple:

Cryptocurrencies are a new medium of exchange. In their most basic form, they are a communications technology that offers peer-to-peer (P2P) transactions, eliminating the need for a third-party (ie. a bank) to carry out and authorize the transaction.

Of the hundreds of cryptocurrencies that have been created since 2009, Bitcoin is by far the most popular and has become synonymous with cryptocurrency itself. For these reasons, the Committee thinks a description of Bitcoin is useful to illustrate cryptocurrencies in general.

What is Bitcoin?

Bitcoin is a computer-coded, P2P cash system. Value is measured in units of bitcoin (lower case b) divisible (into satoshis1) like a dollar into cents. It relies on its own, unique and novel architecture. Bitcoin (upper case B) is a payment system, a decentralized (controlled by users) P2P network that allows for transactions with built-in security, eliminating the need for a central bank. This is Bitcoin’s most distinctive feature – it is not associated with any physical commodity, central banking authority, or government.

Bitcoin transactions are made on the public ledger. The public ledger is exactly what it sounds like – a large bulletin board (written in a cryptic computer database called the blockchain). The public ledger logs and broadcasts transactions to the entire network.

Everyday transactions – using, for example, a debit or credit card to buy a cup of coffee – are tied to a bank. If you have enough money in your account, or credit on the card, the bank authorizes the transaction and you get your coffee. If you bought that same cup of coffee with bitcoin, you would simply announce it on the public ledger without the bank or any other financial institution (and all their transaction fees) being involved. The merchant gets their money and you get your coffee.

The public ledger is always accessible through computers literate in the blockchain. It cannot be forged or changed. It provides a permanent record of all bitcoin transactions that have ever happened, a history that within an hour is unalterable.

The ‘if a tree falls in the forest’ thought experiment is useful here. In the case of Bitcoin if a tree falls in the forest, and millions of independent computers with cameras record its fall, we can trust that it fell. That is the value of Bitcoin – the mathematical verification by millions of computers reaching a consensus that they witnessed the same thing at the same time. Trust in Bitcoin is a product of that security – which brings us to Bitcoin mining operations.

Bitcoin mining is a kind of lottery, except that your computer has to work in order to have a chance at winning. Of the millions of computers working to verify the public ledger, one will receive bitcoin as a reward. And presto, more bitcoin enters the money supply. Thousands of people are acquiring bitcoin this way, and an incredible amount of computing power has gathered to mine and verify the public ledger.

That’s Bitcoin and cryptocurrency in a nutshell. But, our inquiry did not end there. Several times in our study, the Committee heard that bitcoin, the currency, is not the most significant innovation - but rather, the real innovation is blockchain technology.

What is blockchain technology?

Blockchain technology is an ingenious computer code, stored entirely by computers, that forms the underlying architecture for hundreds (if not thousands) of cryptocurrencies and also shows great promise in extending beyond the realm of just currency.


We took a close look at blockchain technology and considered its opportunities. Bringing financial services to the unbanked in the developing world is one of the exciting things we heard about. The Committee developed a vivid sense of how this is possible and already happening.

Another opportunity offered by blockchain technology is its ability to put a person’s security and online identity into their own hands. Cyber-attacks for the purpose of identity theft are becoming one of the defining security threats of the 21st Century. Databases filled with our personal information are under attack from nation-states and organized crime. Hackers who target governments, data breaches at large department stores, even celebrity nude photo leaks are the result of the same problem; criminal elements breaking through cybersecurity to their prize; databases filled with valuable personal information.

FBI Director James Comey recently told CBS’s 60 Minutes, “Cybercrime is becoming everything in crime because people have connected their entire lives to the Internet. That’s where those who want to steal money or hurt kids or defraud go. And so it’s an epidemic.”

A Canadian chartered bank explained that their cybersecurity faces thousands of attacks a day from hackers. Fortunately, they have the resources to fight this onslaught. But the same information consumers are sharing with banks, they are also sharing with online retail outlets. These retail outlets cannot deploy the financial resources a major bank puts into cybersecurity and are left vulnerable to cyber-attacks.

Blockchain technology offers a secure alternative to consumers who do not wish to see their personal information fall prey to the Internet. It offers the ability to transact on the Internet without sharing their personal information with third parties whose databases make juicy targets for hackers. Instead, blockchain technology gives consumers the power to provide their own hack-proof online security.


The security offered by blockchain technology on the Internet has a flip side, however. The anonymity it provides presents an opportunity for criminals and terrorists. Our study takes a look at the criminality around digital currencies, most infamously represented by Silk Road transactions on the so-called Deep Web – an untraceable part of the Internet that allows users to avoid being found by search engines like Google.

U.S. Senator Tom Carper (Democrat, Delaware), the lawmaker who exposed online drug and criminal elements using Bitcoin, stated, “The ability to send and receive money over the internet, nearly anonymously, without a third party, has a lot of wide-ranging implications. The government needs to pay attention to this technology and to understand, and where appropriate, address these implications.”

The ‘wide-ranging implications’ that Senator Carper refers to are money laundering, terrorist financing, and tax evasion. These are the risks inherent in the technology and they mean that, like all industries, a certain amount of regulation is prudent. But to what extent?

The Committee traveled to New York – specifically to meet with the New York State Department of Financial Services – to hear firsthand about proposed regulations being debated, including BitLicenses. These licenses, currently being developed in consultation with stakeholders, seek to regulate the so-called “on and off ramps” for exchanges that buy and sell cryptocurrencies. In short, licensing means that cryptocurrency exchanges would have to know their customers. The Committee believes this is reasonable.


New technologies attendant to cryptocurrency have unimagined applications. We’ve heard, and we agree, that blockchain technology is at a delicate stage in its development and use. This is why we urge the Government to explore the vast potential of this technology, while treading carefully when contemplating regulations that may restrict and stifle its use and development.

We believe that the best strategy for dealing with cryptocurrencies is to monitor the situation as the technology evolves; that Canada Revenue Agency and Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) must prepare to navigate and use blockchain technology; that this technology offers new ways to protect the personal information of Canadians; and, finally, that this technology requires a light regulatory touch – almost a hands off approach. In other words, not necessarily regulation, but regulation as necessary.

1 Named after the alleged and mysterious inventor of Bitcoin, Satoshi Nakamoto. While an inventor published Bitcoin: A P2P Electronic Cash System in 2008 under the name of Satoshi Nakamoto, this inventor has never been identified. So, the true identity of the inventor of Bitcoin is a mystery. The idea of Satoshi Nakamoto is a big part of Bitcoin culture, and when weighing in with their opinion, Bitcoiners are known to say “that’s just my two satoshis”.


Recommendation 1

The federal government, in considering any legislation, regulation and policies, create an environment that fosters innovation for digital currencies and their associated technologies. As such, the government should exercise a regulatory “light touch” that minimizes actions that might stifle the development of these new technologies.

Recommendation 2

The federal government consider the use of blockchain technology when advantageous to deliver government services and to enhance the security of private information.

Recommendation 3

Digital currency exchanges, the “on and off ramps” of the digital currency system, be defined as any business that allows customers to convert state-issued currency to digital currency and digital currencies to state-issued currency or other digital currencies. To minimize the risks of illegal activity in relation to Canada’s anti–money laundering and anti–terrorist financing laws, the federal government should require digital currency exchanges, with the exclusion of businesses that solely provide wallet services, to meet the same requirements as money services businesses.

Recommendation 4

The federal government, on an active and ongoing basis, work with other countries to formulate global guidelines for digital currencies while respecting the “light touch” premise outlined in Recommendation 1 above.

Recommendation 5

The Minister of Finance convene a roundtable with stakeholders, including banks, to look for solutions to the lack of access to banking services for digital currency related businesses, while recognizing the requirements of Canada’s anti–money laundering and anti–terrorist financing regime.

Recommendation 6

The federal government, through appropriate federal entities, provide concise information to the public about the risks of digital currencies and alternative payment systems.

Recommendation 7

The federal government, through the Canada Revenue Agency, provide concise information to Canadians about the tax obligations of digital currencies when received as income, held as an investment, or used to purchase goods or services.

Recommendation 8

Due to the evolving nature of digital currencies, the Standing Senate Committee on Banking, Trade and Commerce review this study of digital currencies and their associated technologies to assess the appropriateness of the regulatory environment in the next three years.

Contact information

General Information:
613-990-0088 or 1-800-267-7362


Mailing Address:
Senate Committee on Banking, Trade and Commerce
The Senate of Canada
Ottawa, Ontario
Canada, K1A 0A4

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