THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
EVIDENCE
OTTAWA, Wednesday, February 9, 2022
The Standing Senate Committee on Banking, Trade and Commerce met with videoconference this day at 6:30 p.m. [ET], in camera, to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8); and to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8).
Senator Pamela Wallin (Chair) in the chair.
(The committee continued in camera.)
(The committee resumed in public.)
The Chair: Senators, we will now begin the public portion of our meeting.
Good evening everyone and welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce.
Before we begin, I would like to remind senators and witnesses to keep their microphones muted at all times unless recognized by the chair. With all our technological complications, that will help us all out.
I would also ask senators to use the “raise hand” feature or to let myself or the clerk know that they have a question or a comment for our witness.
I would like to remind the senators and witnesses to keep their interventions brief to ensure that every member can ask more than one question and so that we can cover the most ground possible.
Welcome all senators online and to members of the public who are also joining us online. My name is Pamela Wallin, I’m a senator from Saskatchewan and I am the chair of this committee. I would like to introduce the committee members beginning with the deputy chair, Senator C. Deacon; Senator Bellemare; Senator Gignac; Senator Loffreda; Senator Marshall; Senator Massicotte; Senator Ringuette; Senator Smith; Senator Woo; and Senator Yussuff.
We have the pleasure this evening of welcoming Carolyn Wilkins, who will share her knowledge of the issues surrounding the intersection of crypto-currencies and the traditional banking and finance sectors. Ms. Wilkins is the former Senior Deputy Governor of the Bank of Canada, so she has been with us on numerous occasions here at committee. She is now working internationally as an external member of the Financial Policy Committee at the Bank of England, and she is also the Senior Research Scholar at Princeton University’s Griswold Center for Economic Policy Studies. She, of course, has spent many years looking at the crypto-currency issue.
Welcome and thank you for accepting our invitation tonight, Ms. Wilkins. If you have some brief opening remarks, please go ahead now.
Carolyn A. Wilkins, External Member, Financial Policy Committee, Bank of England; Senior Research Scholar, Griswold Center for Economic Policy Studies, Princeton University; and former Senior Deputy Governor, Bank of Canada: Thank you very much, senator, for that kind introduction and the invitation to speak tonight about the issues related to the emerging crypto-financial ecosystem.
I know that the committee, and this Senate committee in particular, was relatively early in starting its work on digital currency.
The crypto frontier has been compared many times to the Wild West, which conjures up images of bandits and lawlessness, but we shouldn’t forget that the Wild West is also home to law-abiding pioneers whose purpose is reinvention, expansion and opportunity.
In the expansion it’s very clear. The crypto market has exploded from just under US$16 billion five years ago to some US$2 trillion today. We are seeing a reinvention as well. So the crypto ecosystem is challenging a traditional financial ecosystem that is in places inefficient and exclusive.
There are pioneers from fintech to big tech that are creating new markets, new products, and they are targeting margins of the financial services. Of course with all that, we’re unfortunately seeing financial crime. That issue featured prominently in your 2015 report. So today, just to set the stage, I would like to briefly touch on the three points that I made in a speech at the Rendez-vous avec l’Autorité des marchés financiers in November.
The first point is really quite simple. The crypto assets are the bedrock of an emerging financial ecosystem. So consumer protection and market integrity are not only critical to driving out the bandits but also critical to supporting law-abiding businesses that are trying to operate in this market in a responsible manner.
If we start with unbacked assets like bitcoin, there is no intrinsic value and it lacks a credible mechanism to stabilize its value, so the price is highly volatile. That’s why bitcoin serves as a speculative investment asset rather than money and individual holdings are subject to capital gains tax at disposal in many jurisdictions.
Around 95% of the crypto market is unbacked, so more needs to be done to respect investor protection and market integrity, particularly given that exposure to these assets is widening to the retail investor via crypto exchanges and new financial products like crypto-based ETFs. Obviously, regulators know this so they have begun to respond around the world. I would say that the regulatory frameworks are still very much in progress.
The Canadian Securities Administrators here were one of the first to establish registration requirements for crypto trading platforms and have done a good job in setting out expectations with regards to client protection.
What is lagging — and, of course, they know this — is the regulatory, supervisory and enforcement capacities. A lot has been happening in the U.K. We can talk about that.
The crypto pioneers have introduced “stablecoins” that are there to try to assess the instability of unbacked crypto assets. They do this by pegging either against a fiat currency or other assets in maintaining reserves or backing assets in the background. They are not yet widely used for mainstream payments, so you wouldn’t see them every day, but they do act as a bridge for investment in unbacked crypto assets or collateral for loans and play a key role in the development of decentralized finance, or DeFi.
I think that stablecoins could yield some positive use cases in terms of lower-cost payments and competitive payment services both domestically and cross-border, but these benefits will only be realized if the stablecoins are safe. We have seen cases — one in the U.S. — where a stablecoin provider had falsely claimed that their tokens were fully backed by U.S. dollars. So the concerns about quality and transparency of backing arrangements are legitimate.
The Bank of England’s Financial Policy Committee, on which I am a member, has set out expectations for systemic stablecoins that cover payments designed as stablecoins and those that are more like money-like instruments. I think as Canada considers its response to stablecoins, it can look to these examples and other international work in the area.
My second point is that the opportunities and risks here extend well past the crypto assets themselves to encompass what is a widely expanding range of financial services. It goes from lending to insurance, and it’s increasingly enabled by decentralized finance or DeFi.
The total value of locked investment — a value that is locked into DeFi — is over $100 billion. It’s growing fast. I’m part of the Blockchain Stream at Creative Destruction Lab at Rotman, and I can see investors are pretty excited and so are developers. That’s because of the several potential advantages DeFi could give. Decentralization reduces a reliance on intermediaries and their inefficient infrastructure.
You have smart contracts in this process that enable an automated execution and creation of new financial instruments. Of course the DeFi protocols are open-source so you can see the code, you can audit it and every transaction is visible on the blockchain.
There is always going to be a “but” with an ex-central banker and a regulator. DeFi arrangements raise some issues. The most immediate relate to fraud, misappropriation, conflicts of interest and cyberattacks. In some cases, despite the claims of decentralization, the operations and activities under the hood of DeFi are governed or administered by a small group of developers and investors.
Is DeFi a financial stability concern? I agree with those who say that DeFi doesn’t pose systemic risks today but also who say it’s an area that is growing fast and so it could pose financial stability risks in the future. Think of what is starting to emerge right now, which is leveraged players. This is something to watch because a sharp fall in the value of a crypto asset can trigger margin calls and forcing leveraged investors to liquidate positions. We have seen this snowball before in the global financial crisis. It wasn’t pretty.
The third and final point is that the future of the financial system depends critically on the regulatory response to these new activities in how fast the traditional financial system modernizes. Jeff Bezos — and everybody has heard this — famously said, “Your margin is my opportunity.”
That means the traditional world can’t avoid competing along similar lines with fintech and DeFi. That means that you increase the quality of services and you need to reduce the cost to customers. This is a positive outcome in terms of contestability of financial services.
Central banks also need to modernize. There are over 50 central banks now that are researching and experimenting their own digital version of cash. The Bank of England and the Bank of Canada have been collaborating closely on this for a number of years.
There are many issues that still need to be resolved, but I’d like to emphasize what I think is the deepest issue here. It relates to the importance of universal access to a safe medium of exchange. It’s foundational to trust in the financial system, and because of that, I think it’s a public good.
Also, there’s potential for a central bank’s digital currency to enable more efficient cross-border payments and innovations like smart money.
I will conclude by saying that we find ourselves at an important juncture today. We have considerable potential for crypto-based innovations, but the space is evolving in a largely unregulated way with very few guardrails with respect to financial stability, investor protection and market integrity. It’s growing fast, and it raises complex issues. We have to be timely and ambitious in creating a modern legal policy and regulatory frameworks for the crypto ecosystem.
If it’s done well, we’ll realize the promise of reinvention and expansion for those who rely on efficient and trustworthy financial services.
With that, I’d be happy to take your questions.
The Chair: Thank you very much. You’ve raised some of the big questions around whether we’re ready for this and the vulnerabilities in the financial sector.
We’ll start our questions with the deputy chair.
Senator C. Deacon: Thank you very much, Ms. Wilkins. It’s so nice to see you again. I’m grateful to our chair for twisting your arm to come back and see us.
You touched upon this, but I really worry about the reactionary approach to CBDC, because it will likely be quite slow, requiring political support, legislative changes and technical rollout. I contrast that with the rapid S-curve of adoption that follows many disruptive innovations. I’m sure Apple is hoping that will be the case with its new tap-and-go service it just announced, which will have crypto payments through Coinbase and effectively turn phones into point-of-sale devices.
In this context, I wonder about the risks to Canada if we play on defence, reacting to risks, and not on offence by embracing and enabling opportunities. What criteria do you think need to be met both politically and at the Bank of Canada in order to make the determination to be proactive in implementing a CBDC in Canada? Thank you.
Ms. Wilkins: That’s a great question. It is the fundamental question about what the criteria are. In fact, the Bank of Canada has written something that says what the necessary conditions are. One of those is related to whether or not citizens have access — and meaningful access — to cash. They still do; they are still using it. But it’s becoming less and less a thing that you reach for when you go to pay for something. That’s not just a generational thing; it’s because of the internet, and it’s no good for digital payments.
The reason that’s a real trigger point to think seriously about is because it means that, to make payments, citizens would be required to go through a profit-making institution to have a secure way of making an exchange. You have to think hard about that. Is that what you want for your society?
But there is more than that, because if you’re going to give the central bank a new tool — instead of physical cash, digital cash — it has a lot of implications for the financial system that need to be thought through. In particular, what does it mean for a really great source of funding for banks? Deposits being one thing.
You need to have a solution that figures that out. Of course, there is one that is available, but it’s an issue.
Privacy is another one. People have legitimate needs for privacy. Privacy isn’t always so that you can get suitcases of cash to buy a car or whatever you are doing with illicit activity. It can be just because we value choosing when we give up our privacy or not.
So there needs to be the right security features in the central bank digital currency move — in any digital currency — that means you can meaningfully and reliably respect privacy laws. That’s another one.
Those are just a few elements that would be the criteria. I think a safe and prudent way is actually to create a pilot and test it. That’s an option that many central banks have either tried or are in the process of putting together. It’s a way to work out the kinks and have legislators — because it would require legislation I believe — and policy-makers comfortable with the central bank taking this on.
The final thing I will mention is the distribution model, which is pretty important. It doesn’t have to be that everybody has a bank account at the Bank of Canada if they do this; it could be distributed through a wide range of financial institutions and provide, perhaps, the same safety but a better interface with the customer, given how innovative the private sector is relative, usually, to central banks.
The Chair: Thank you. Senator Deacon, do you have a short follow-up question? I’m going to remind everybody that we have very limited time tonight.
Senator C. Deacon: I have a very short follow-up question. I would love you to think about this, and maybe we will get to it in the second round. What would be the conditions necessary to get that pilot going? Because that will require, again, the same sorts of elements — the political leadership, the legislative framework and technology build? Perhaps in that light, I will leave that for a second round.
The Chair: I would like you, at some point, in either an answer to me directly or others to discuss this. You have talked about the fairness in asking people to go through some more formalized structure that the banks will create or the governments will oversee, but people are charging ahead and doing this without any regulation. I heard a statistic this week that there were more crypto transactions last year than there were with Visa. If it’s moving at that kind of speed, then everybody had better hurry up.
Put that into the context. But we’ll move on to other senators’ questions.
[Translation]
Senator Bellemare: Welcome, Ms. Wilkins. It’s nice to have you here.
The Senate conducted a study in 2015 on crypto-currency. As senators, we were very surprised by and excited about blockchain technology. This technology, which seemed very promising, showed us some terrifying things in terms of crime. However, we’ve seen some wonderful things with crypto-currency, especially for people in African and developing countries. It enables them to make payments and transfers from their cell phones at relatively low costs, without necessarily having a bank account.
The good things that we saw led us to recommend that the government not over-regulate. We concluded that regulations should be implemented only if necessary. That was our first approach. However, now with the development of the technology, we might need to regulate.
What do you think about our recommendation, and how should we change it? In other words, can you recommend any specific regulations for crypto-currency?
Ms. Wilkins: I read the report recently to remember the details. At that time, in 2015, it was probably normal since the market was quite a bit smaller and in its infancy. However, the technology has exploded in recent years. When we look at the recommendation right now, it makes me raise my eyebrows a little bit whenever I hear “Had we known, we would have started earlier.”
That said, I think that there’s momentum right now in terms of the regulators. The things that I see moving forward quickly, depending on the variables, are the issues. These issues are very complicated. There’s the whole legal realm. There are contracts and business models that must be understood and technical issues that stem from information technology.
Our mandates with the bank and market regulator are separate. We have a separate central bank, while issues are grouped and mixed together. For example, what’s a non-fungible token? Is it a security? Is it a bond? Is it a derivative? It depends. Is it a piece of art?
I think that we really need to start by focusing our energy. We must also form a group, a type of team of people who have the skills to understand the issues as a whole and who can then decide what framework to adopt.
If we do this separately and go back to our current mandates, we’ll deal with derivatives and securities. However, we won’t touch anything else. With this type of approach, there will be unregulated things that should be regulated, while our mandates may need to be changed.
[English]
Senator Loffreda: Thank you, Ms. Wilkins, for being here. In your speech when we last met in Montreal — and this evening you shared your views on the future of the crypto ecosystem and addressed how this new frontier depends critically on the regulatory response to these new activities and how fast the traditional system modernizes — you argued that major investments in domestic and cross-border payments as well as digital governance will be needed. Beyond these major investments and given the many risks that you did mention of using crypto-currency and the ecosystem — including changes in valuations, volumes, impact on strategy for corporations, decentralization, audit, tax evasion, the list is long, not to mention AML — in your opinion, how fast will the traditional financial system modernize? Do you see a benefit or an opportunity for Canada to modernize and keep pace with other jurisdictions? To what extent and how quickly should Canada modernize given all these risks?
Ms. Wilkins: I’m going to flip the question around and say if there is an opportunity there to have a more competitive, more efficient and safer financial system using technology, maybe not exactly the way it’s being used right now in bitcoin and in DeFi, but using that kind of thinking as a base to modernization in some areas, why wouldn’t you do that?
If you can guide that responsible development in a safe way, then we’re going to reap the opportunities. We’re not alone, so maybe in the regulatory area, we can lead in the development area and be there with the big players. We already see that with some of the investments that are made here in Canada.
Remember the theorem was co-founded by a Canadian. But the businesses that are serious and responsible, and that are wanting to do that here, need some regulatory certainty to make sure their business model makes sense. They also need some of the changes; data was one I made. This is important because the smaller players have various entries, so they need access to the digital world. Open banking, for example, on the data side would help. Getting access to smaller players to payment systems like retail payment systems would help. All this takes some thinking about what is the architecture we want for the Canadian financial system.
That is why I was saying to Senator Bellemare that we need a dedicated cross-functional tiger team with the right skills to think this through about how to do it and then get it done.
Senator Loffreda: Some countries have adopted bitcoin as legal tender. Do you see many other countries doing so and the challenges faced in the growing acceptance of the alternative virtual currencies used as legal tender?
If you do see other countries adopting that, which ones have you heard would follow on that path?
Ms. Wilkins: I think that you are talking about El Salvador?
Senator Loffreda: Yes.
Ms. Wilkins: One would have to scratch their head if there was a central bank that had some credibility, in a legal system that had the certainty law and law enforcement, why anybody would do that. I don’t see that being a widely followed strategy. One of the big problems is you lose control over your domestic monetary policy, which has a lot of problems, as you know, from smaller countries that are mostly underdeveloped that are dollarized. It is a bit of the same problem.
Aside from that, if you are dollarized with the U.S. dollar, you can benefit, or not, with what is happening in U.S. monetary policy. Bitcoin in my mind does not have a credible stabilization mechanism. The fact that supply is fixed I think is a problem rather than a solution. We all know from the 1970s and the 1980s that money growth rules don’t work because the demand for money is so unstable, that is why you see the value going up and down. For those companies that have adopted or feel that they are going to adopt, it could be a rocky road. I think the IMF has written something about that.
Senator Smith: Thank you, Ms. Wilkins, for your presence tonight. Talking about crypto, the concerns are really looking at illicit activity, organized crime and gangs, transferring illicit funds using bitcoin almost instantaneously around the world without having the need to transfer large sums of cash across borders. There is also the argument about the quasi-anonymous feature of bitcoin which includes wallet, addresses, a series of letters and numbers but do not include the names of people. Can you talk to us about bitcoin? Does it make it easier for criminals and gangs to conduct their illicit activities compared to fiat like U.S. dollars? If so, how do we counter this?
You had an initial comment on it when you started your presentation. I wondered if you could develop that idea of how you manage or combat crime in the activities that criminals could have.
Ms. Wilkins: It’s true that there are illicit activities that are happening in bitcoin. The estimates of how important it is are so wide — even wider than the estimates for illicit activities in cash. The thing about this is you can do it in wider amounts. I think the fact that this is pseudonymous — and that’s a problem — is overplayed. I look at it the other way, in the sense that with the right forensics, you can eventually trace back to the owner. It is not impossible. If fact, there were things in the news recently where the U.S. government was able to recover funds and arrest two people in a heist that happened in 2016. There will always be an ability for criminals to do what criminals do. At the same time, the rules are being adjusted so the Financial Action Task Force, or FATF, which is an international anti-money laundering agency, has set out standards. Those have been adopted across the world. The forensics with companies like Chainalysis, some new players like Oracle are finding a way to do forensics on the blockchain. It’s all there. You just need to be able to sift it to try to root out some issues.
So I think that there’s crime in the financial system today, the traditional one. There will be crime there, and it is a question of finding tools that will help identify it.
Senator Smith: We have FINTRAC and other tools, but how successfully have those tools been utilized in the past and would they be able — in a new environment, in a new world — to be able to go after criminals with bitcoin?
Ms. Wilkins: In theory, they could do better than they are doing today. And it’s not a criticism of FINTRAC. This is hard stuff. You need new technology and new people. They need to keep up. They know that. I don’t think that you can ever root out completely the criminal activity. But can we do better than today, and should we do better than today? Absolutely. And the fact that it is on the blockchain actually should help rather than hurt.
Senator Smith: Thank you.
The Chair: What does that require? If you want to see FINTRAC be more able, what does it need that it doesn’t have now?
Ms. Wilkins: I would love to give you a full answer on that, but I haven’t thought it through in terms of FINTRAC specifically. But what I can see, whether it is FINTRAC or any kind of regulator, is that the very first thing you need is a legal framework that is fit for purpose, and it isn’t always. You also need to have the right people actually doing the work and the right technology. I know before I left the Bank of Canada we got new responsibilities for retail payments. We had to hire completely different people than we had and build a whole new business model for it. It’s a big build so they need to be supported in that.
The Chair: That is an interesting point.
Senator Woo: Thank you, Ms. Wilkins. I would like to talk a bit more about stablecoin, in particular CBDCs, and try to understand a bit more why our central bank is not moving more quickly in the development of a central bank digital currency. You mentioned cash is widely available. I’m trying to think about why that would be an obstacle; presumably because then they don’t have to use fintech products and therefore there is no pressure on them to migrate. But isn’t there the reverse argument? You are very good at making reverse arguments. Isn’t the reverse argument that the central bank could, in fact, stimulate innovation in our fintech industry by moving a bit faster on central bank digital currency, particularly when I think it’s already recognized that the payment system is a bit expensive because of the lack of competition? If we’re holding back on competition because there is cash, then you are just exacerbating the high payments cost of our financial system.
Ms. Wilkins: I can’t speak about what is happening in the Bank of Canada now and in the last year because I haven’t been there. What I can say is that having worked closely in the development of the work plans and in the execution, they are putting everything at this question and working on it quite diligently. I can’t overplay just how complex it is.
For a central bank, back to the question, what are the conditions to be able to go out and do it? They are pretty high, because the banks’ reputation needs to be preserved. So you need to think about all kinds of security issues; how you are going to manage your balance sheet with this, among many other issues. So there’s something to be said about the right pace, and fast isn’t always better.
That being said, I agree with you on the innovation. I think there’s a whole positive use case for CBDC. There are papers written not by central bankers but by the private sector, including the chief economist of the now-spun-off Diem project, Facebook’s project, who wrote a paper talking just about that. So it’s an opportunity, but it’s only going to be realized if central banks are supported in the work that they are doing and they get a move on, which I think they are doing.
[Translation]
Senator Gignac: Good evening, Ms. Wilkins. It’s good to see you again in different roles. Congratulations on your appointment to the Bank of England’s financial policy committee. As a Canadian, I’m proud that the Bank of England, for a second time, has sought out the best minds to provide advice.
My question concerns all the exuberance that we see around crypto-currency. The types of crypto-currency aren’t the same. You referred to bitcoin. When I was giving talks, I was asked more about bitcoin than the stock market. Do you find that regulators in Canada are doing a proper job of educating Canadians about the risks associated with investing in crypto-currency? Should they be doing international comparisons, if any inspiration can be drawn from other countries, to protect Canadians and young investors?
Ms. Wilkins: I think that they’re making an effort to inform these people. However, it’s hard to know whether the people are listening to them. Remember 10 years ago, with securitization, as with asset-backed commercial paper, we tried to tell people that maybe it wasn’t a good idea and that it would end badly. To be sufficiently informed, people had to read 10 feet of documentation to fully understand. I figure that we can inform people. However, at the same time, if people want to buy a lottery ticket or bitcoin, they’ll do so. The important thing is that the trading platforms and the places where the transactions take place are covered by consumer and investor protection regulations. We must ensure that the market for transactions is fair and that there isn’t any manipulation. The same concerns apply to traditional markets.
Senator Gignac: Thank you. I may have more questions in the second round, Madam Chair.
Senator Massicotte: I wanted to extend my greetings to Ms. Wilkins, even though my question was answered. I don’t need any speaking time.
[English]
Senator Yussuff: Thank you, Ms. Wilkins, for being here this evening. Given this is a global phenomenon, not just a Canadian one, and recognizing, obviously, that we will at some point need a multilateral approach to deal with this, can you share any perspectives at the multilateral level that are developing that will help address this?
I think that there are two of us on at the same time; I hope that you heard my question.
Ms. Wilkins: I did hear it. It’s something that’s on a lot of people’s minds. You’re absolutely right that it needs an international approach, not only because they are international markets, but to the extent that they are occurring in different jurisdictions you want interoperability to get the benefits. So the rules, just like with banks, need to be somewhat compatible and not create frictions that increase costs. There are international bodies that are working on it. I used to be on the Financial Stability Board, which is very involved in looking at the issues. There is the CPMI-IOSCO. These are entities that look at payments, clearing and settlement systems and other financial market infrastructure, of which in the crypto world there’s a ton of this stuff; and then, of course, the securities regulators. They create international standards and have written about stablecoins, among other things, to try to guide jurisdictions to doing the right thing. The Basel Committee on Banking Supervision has come out and given their view on capital requirements for holding those kinds of assets.
I think where there’s going to be trouble that’s different is the fact that there are so many cross-cutting issues in crypto that it’s unclear who is actually in charge and how we’re going to coordinate, because this is a coherent problem. Just like it is domestically — and I said we need an everybody-on-board, dedicated cross-functional team — it’s the same internationally. Who is going to be in charge of that has yet to be decided. I think it’s going to be necessary.
I guess the other challenge is going to be not everybody is part of that international financial infrastructure. So just like with shadow banking, if you have tax havens or regulatory havens in some areas, then you are not going to be able to capture all of the issues. However, you will be able to capture the issues where there are bridges between the crypto system and the traditional financial system, but you won’t be able to catch everything unless we can get everybody on board.
Senator Marshall: Thank you, Ms. Wilkins, for your comments. I’m really cynical with regard to crypto-currency. Listening to you now, there are so many implications in establishing the regulatory framework. You talk about international implications and that the bank needs support. Then we look at things that are more basic. If we look at money laundering, Canada has a terrible reputation in terms of how it’s doing.
Looking into the future, do you see a decent framework being there within 5 or 10 years? I wouldn’t put my money in crypto-currency now, but you say we’re going to make progress. Looking into the future, when do you think we’ll have a decent system that people will have some confidence in? Are we talking about 5 or 10 years, or is it going to be beyond our lifetime?
Ms. Wilkins: If it’s within 5 or 10 years, I hope it’s within my lifetime. It’s a good question, because we don’t know where this system will settle out.
I would say two things. One is that it’s up to us. Actually, in part, it’s up to you. You’re the ones who make things move, along with parliamentarians. So that is a question that you are better placed to answer. With enough work, yes, we can get there in 5 to 10 years.
The second thing I want to say is that I think what we should focus on is the technology and what it can enable, and the use of stablecoins or unbacked crypto-currency as kind of a utility providing a service within that system, rather than a world where everybody’s investing in crypto assets as a speculative thing.
Where I see the potential isn’t that at all. I think that’s just where it is today because we’re in the same phase we were with the internet I don’t know how many years ago. People are just speculating on where it is going to settle out. But once it starts to, it is going to be all about the foundational elements of the financial system. Those assets are going to be used for a purpose in the system that enables it. We need a regulatory framework that will help that.
Senator Marshall: The scariest part of your response is when you said it’s up to us and we’re a part of the government, because government is not known for moving fast. Government will be the last one to move.
I’m looking at this crypto-currency now. Whenever I hear about somebody buying crypto-currency, I just don’t see that there’s enough yet in the framework to have confidence in it.
If we’re going to depend on government to help us along, I think we’re going to be a long time waiting. We can’t even get our hands around tax evasion and money laundering, and crypto-currency is really complex. I think we’ve got a long way to go.
Ms. Wilkins: We do, and we need to do it. Hope springs eternal in me. Necessity is maybe the mother of invention, but during the COVID crisis I saw a lot of things happen faster than I ever would have imagined. After the crisis in 2008-09, I saw the international community revamp all kinds of financial regulation that has actually stood us in good stead.
So it is possible, but we need to empower and enable the regulators to do what they can do outside of legislation and outside of government. And where it is necessary to change legislation, we need to have the focus. I know there’s a lot to do, so it’s hard.
Senator Marshall: We remain hopeful.
Ms. Wilkins: We do. Thank you.
The Chair: You did mention earlier that, “We don’t know who is in charge.”
Ms. Wilkins: Yes.
The Chair: Can you tell us who you think should be in charge?
Ms. Wilkins: I was talking about internationally. That sounds like a great headline. I didn’t mean that no work was being done or that it wasn’t progressing. I was just thinking that for it to get to that 5- or 10-year mark, more coordination is necessary; and to do that, you need somebody in charge.
For the Basel reforms and over-the-counter derivatives, the Financial Stability Board was a coordinating mechanism. That could work. The Bank for International Settlements has been doing excellent work there. There are a number of opportunities. I can’t just name one right now because I haven’t —
The Chair: But domestically, when you talk about government or regulators, at a certain point we have to pick something.
Ms. Wilkins: Okay. I will give you the U.K. as an example for domestic, where it is an interesting framework. It does not have to be exactly the same.
The Financial Policy Committee and other policy committees of the Bank of England have a clear legislated mandate and clear agendas and transparency around those, as well as reporting that goes back to the government. On top of that, they have a wide range of people at the table who can help take the decisions, and they have clear tools. So it makes it a lot easier to have these conversations and to move them forward. I’m not saying it is perfect, but it is helpful.
In Canada, there’s a group called the Heads of Regulatory Agencies, a group that is chaired by the Governor of the Bank of Canada. It’s an informal body that has a lot of the right people around the table. Leveraging that to help move these things along could be a really good idea.
Senator Ringuette: First of all, it is very nice to see you again, and I’m happy that you are very much involved in your passion, shall I say.
When you talk about “architecture” and “bridge,” in my mind, I see that the role of the Bank of Canada should be to develop a mirror stablecoin to the Canadian money, just like every other central bank will be doing. Or do you see that, in this global context, there will be a decision to adopt, let’s say, a four or five stablecoin from central banks, and that will be the coin that will be assigned a certain value, the bridging part that you are talking about? In that context, I see that the Bank of Canada would be assigning a certain value to this stablecoin.
Would it be also acting as a broker? Because we’re talking about fintech, going beyond, in Canada, the six financial institutions. What is your intention with regard to architecture and bridging?
Ms. Wilkins: If I understood your question correctly — and it sounds like it’s a profound one — there is a group of people who think this is an opportunity to renew the international financial architecture such that not every country has their own currency; we actually have our currencies in a basket, a stablecoin, that then creates a coordinating mechanism across exchange rates. In fact, that was partly a suggestion of the Libra project — which ended up being called Diem at the end — from Facebook. I’m not sure it would work. I’m not sure it’s necessary because of the coordination that would be required, and whether or not it would actually be the best thing for monetary policies in sovereign states.
That being said, even within a country, the question of “what is the role of the central bank?” is important. There is a great paper I would be happy to send to the community here from the Bank for International Settlements, or BIS. It talks about different distribution models for a central bank digital currency that involves everything from an integrated model where the central bank provides a bank account for every Canadian and provides the depositing and withdrawal of services that go along with that to a distributed model, almost like a synthetic central bank digital currency, where all they are doing is underwriting the currency that major financial institutions — or whoever is allowed to do it — issue.
Then, in between, there are hybrid models, where only the balance sheet is being used, and the fun stuff on the front that consumers see would all be done by private institutions. They do an assessment of what makes the most sense, and they come up with a hybrid-type model. There were a lot of discussions about that.
In my view, the important part is that whatever consumers are using, it needs to be a liability to the Bank of Canada just like a banknote is. How it’s distributed and the role that the central bank has should try to leverage a private-public relationship where the private sector’s innovation is properly guided and put to good use.
The Chair: Great. We will ask you to send that document along if you would. Just make a note, and we’ll accept that.
Just a quick point, Senator Ringuette, because we’re running short on time.
Senator Ringuette: I wanted to ask Ms. Wilkins to send us that document.
The Chair: Perfect.
Senator Ringuette: It’s important. Thank you.
The Chair: We have just about 15 minutes left, not quite. We have several people on the list, so we’ll try to go for a quick second round.
[Translation]
Senator Bellemare: My question concerns a key component of crypto-currency production: energy. We need energy to produce crypto-currency with blockchain technology. Do you see this environmental aspect of energy production as a significant limitation in terms of digital currency? Doesn’t this conflict with the needs of the future?
Ms. Wilkins: Absolutely. Energy consumption related to the bitcoin system is estimated to be as high as all the energy used in the Netherlands. That’s quite staggering. At the same time, it’s a result of how the blockchain works. We need many security measures. This means that the cryptographic issues that require a resolution must be challenging. It takes time and energy. There are other methods of building consensus, such as proof of stake. This may lead to other issues, but energy use isn’t one of them. There are ways to avoid this. It’s important to know that, for a crypto-currency from a central bank [Technical difficulty] central bank doesn’t need and wouldn’t rely on a blockchain at all, where no permission is required. Instead, we’re talking about permission-less blockchains, which consume as much energy and are based on proof of work.
Senator Bellemare: Thank you. This is very useful information.
[English]
Senator Woo: The development of digital currencies and the race for a country to be the first mover in this field is not value-neutral. It’s not taking place in the spirit of multilateral cooperation of the sort we talked about a few minutes ago.
Just thinking ahead a little bit, what do you think are the implications of the rapid development of digital currencies for the reserve currency status of the U.S., the reach of the U.S. dollar and the use of the U.S. dollar in international payments? These are critical questions today that are at the forefront of many of the tensions that we see in international relations.
Ms. Wilkins: We know from history that a reserve currency doesn’t last forever. No one would ever say it’s infallible. If what you’re impugning is perhaps the fact that China has come out with a pilot — a fairly advanced pilot on a digital currency — would that threaten the reserve currency status of the U.S. dollar, no one knows for sure. But it’s not just the technology and delivery mechanism for money that matters. It’s also the whole regime that goes behind it.
Capital controls and the certainty around whether they are there and if they could be changed are also issues. Development of financial markets in China and all that goes into being a major reserve currency would have to change, and that takes time. It seems to have slowed down.
Another issue with respect to digital currencies that are state-sponsored could be that they may be used in a lending relationship with another country to do the transaction and provide a mechanism to avoid going through SWIFT, which is the way —
Senator Woo: New York.
Ms. Wilkins: Yes. There is a mechanism to keep those sanctions and to monitor them to be able to see the payments, but if the payment is going bilaterally through different countries and not through a system called SWIFT, it makes it more difficult. Aside from the reserve currency status, there are other questions.
It would be better if countries had some similar features in central bank digital currencies, if only to try to reap the benefits in cross-border payments as much as possible. That would be one reason. But there are other policies and spillover reasons that are important.
I would emphasize that a lot of countries are working together with the BIS, including Canada, and they are working together well. It’s not that there is not a good group of countries that are trying to row in the same direction.
[Translation]
Senator Gignac: In this digital economy, for many companies, access to data is key. This helps to adapt and expand the product and attract more people to their platform. We can see this in the stock market. The value of the market capitalization of companies is tied to data. However, if we had the monopoly of a central bank with digital currency, it would be a completely different model. The central bank doesn’t have that commercial motivation, unlike private companies. How can we reconcile this as parliamentarians? Yes, we believe in the private sector. Yes, we believe in innovation and wealth creation. How can we, while encouraging innovation, protect Canadians from the risks that all this may entail?
Ms. Wilkins: I still believe that consumers must have a choice regarding how they share their data, whether or not they choose to share it. A central bank digital currency would provide that choice. We must remember that this isn’t just about creating wealth. Are we fuelling a poorly distributed wealth? This type of data use, in the current environment, generates a great deal of concentration within technology companies. As you know, Senator Gignac, the literature shows that this constitutes one factor that undermines wealth distribution.
As senators and legislators, you must look at the full situation. Also, I don’t believe that a central bank digital currency would rule out all other payment methods. We have several different payment methods in our wallets. We can decide to use any of them. Above all, this must be an option.
Senator Gignac: Thank you.
[English]
Senator Yussuff: Given that one of the motivations to get their political system to move is jobs and technology, is there a way to contextualize what would be the broad implication in terms of technology if Canada it was to lead on this issue and, similarly, jobs?
Ms. Wilkins: There is the wider issue of investment in technology and deployment of it to commercial uses. That creates a really productive environment to have good jobs and incomes for Canadians. We have seen that over time with many technological changes.
This particular one and the approach to it are indeed creating the right framework. It’s just one part of creating a framework for innovation in the rest of the economy. We’re coming out of COVID, investing in long-term growth with long-term focus on long-term innovation and investments that will yield returns for Canadians and it is really important.
Some people think that creating this kind of innovation, this space, looks a little like a race to the bottom. If we don’t do anything, then there will be innovation. That’s probably true, but it just seems to me that you might not get the kind of innovation you want.
The businesses that I speak with, so many of them say, “Gosh, the thing that really matters to me, whether it’s in crypto, whether it’s in other kinds of fintech or other parts of the economy, regulatory certainty, knowing I’m going to be in there with the good guys. And, yes, sometimes we don’t love it, but it actually helps me decide whether I have a viable business model or not and what the return on my investment is going to be.” So I equate innovation with the right guardrails and the right framework.
The Chair: Thank you.
Senator C. Deacon: Thank you very much, Ms. Wilkins, for being here tonight as a private citizen. Your experience is very helpful. You have raised a lot of considerations that the bank has been weighing, and you have highlighted the time needed to put in place something safe and well managed in terms of a CBDC that protects privacy while control-regulated.
You have also observed that unregulated action can result in innovation that might not be the kind of innovation we want.
Then you spoke about something close to my heart — that CBDC’s and other innovations can play a role in driving efficiencies in our economy and the productivity growth that results.
How about I ask a similar question to the first one a different way. Is there a country that is showing signs of mobilizing the political will to implement the legislation and the technology in a responsible pilot project that could be scaled when and if they need to take defensive action or move more aggressively to take advantage of an important opportunity? Is there a place that we could look to for that example globally, where someone is getting it right or looks like they are starting to get it right in this regard? Thank you.
Ms. Wilkins: If you look at Sweden, they started early. The Riksbank has been working on it for a number of years. It’s an interesting model where they have been very open and moving forward on this front, and consulting. They seem to have a dialogue with the legislator government that is productive.
If I look at the U.K.’s experience, they have put together a committee — again, I can send you the link of what it is — and it has the Bank of England. It has the right players on it, including government. They are there to advise on this.
I don’t think that any central bank has said, “We’re willing to pull the trigger.” I wouldn’t say that either myself. It’s just that no one wants to not be ready if that is what you decide, because timing really matters. So they have the pedal to the metal on it right now. I think that models and advice — that have a group of people who can advise the central bank that is moving things along with the various stakeholders that are important, public consultations — and all the kinds of things I know that the good folks at the Bank of Canada have in their heads is the key to moving this.
The Chair: I heard you say that you think it’s important that the central bank establish a currency so that it’s a bar, so that they are in the market, so they can see what needs regulating. Do you think that’s a must?
Ms. Wilkins: I don’t think it’s the only way for the central bank to run monetary policy or ensure financial stability or to have their finger on the pulse of the financial system. I’m saying that without cash, the service that the central bank is providing today would be lost to Canadians. We take it for granted because it’s in our drawer, it’s no longer in our wallet, but it means that you don’t have to have a bank account to make a payment. You don’t have to go through a profit-making institution. That’s a pretty important public policy decision, in my mind.
It’s something that is natural for a central bank to do. There is nothing like a central bank liability. There is no greater safety than that, and so it’s worth looking into.
To the points that have been raised today, if everyone else has got one and we don’t, and it’s part of the new financial infrastructure, then Canada will not be well placed. We need to make a decision. We need to look at it quickly.
The Chair: Thank you so much. You really have covered the waterfront for us tonight. It was superb. Thank you for your time. We will, I’m sure, talk again.
Ms. Wilkins: It was a pleasure. Thank you for the invitation. I hope you all stay well.
The Chair: Thank you so much.
Colleagues, we just have one more item here for consideration, because I need to move a motion that the document entitled “Under the western sky: the crypto frontier,” which is a speech by Carolyn Wilkins, be filed as an exhibit.
I would like to add that the document that she referenced, the Bank for International Settlements document, also be filed as an exhibit.
Do I have agreement on that?
Hon. Senators: Agreed.
The Chair: Okay. Then I declare that motion carried, and we will make a note of that.
Senator Ringuette: Madam Chair, will you be distributing these two documents?
The Chair: Yes, of course. They need to be translated and whatnot, but we need to have them filed as exhibits so that we can do that. Thank you for your help and cooperation on that.
We will meet again for a full meeting on February 23. There will be another session of the subcommittee, of course, to narrow down the guests for that meeting. We’ll keep you apprised and send that information out so that you’re thinking about that, sometimes even before we get the documents from our committee supporters here.
Thank you all very much, and we will see you in two weeks.
(The committee adjourned.)