Second Session Deuxième session de la Forty-first Parliament, 2013-14

Second Session Deuxième session de la Forty-first Parliament, 2013-14
Second Session
Forty-first Parliament, 2013-14
Proceedings of the Standing
Senate Committee on
Banking, Trade and
Commerce
Chair:
The Honourable IRVING GERSTEIN
Wednesday, February 26, 2014
Wednesday, March 5, 2014 (in camera)
Wednesday, March 26, 2014
Thursday, March 27, 2014
Fascicule no 6
Ninth and tenth (final) meetings on:
The ability of individuals to establish a registered disability
savings plan (RDSP), with particular emphasis
on legal representation and the ability
of individuals to enter into a contract
and
et
First and second meetings on:
The use of digital currency
INCLUDING:
THE THIRD REPORT OF THE COMMITTEE
(Report entitled: The Registered Disability Savings Plan
Program: Why isn’t it helping more people?)
WITNESSES:
(See back cover)
51235-51247-51275-51281
STANDING SENATE COMMITTEE ON BANKING,
TRADE AND COMMERCE
COMITÉ SÉNATORIAL PERMANENT DES BANQUES
ET DU COMMERCE
The Honourable Irving Gerstein, Chair
Président : L’honorable Irving Gerstein
The Honourable Céline Hervieux-Payette, P.C., Deputy Chair
and
et
The Honourable Senators:
Bellemare
Black
Campbell
* Carignan, P.C.
(or Martin)
* Cowan
(or Fraser)
Greene
Maltais
Massicotte
Ngo
Ringuette
Rivard
Tkachuk
Bellemare
Black
Campbell
* Carignan, C.P.
(ou Martin)
* Cowan
(ou Fraser)
Greene
Maltais
Massicotte
Ngo
Ringuette
Rivard
Tkachuk
* Ex officio members
* Membres d’office
(Quorum 4)
(Quorum 4)
Changes in membership of the committee:
Pursuant to rule 12-5, membership of the committee was
amended as follows:
The Honourable Senator Black replaced the Honourable Senator
Mockler (February 26, 2014).
The Honourable Senator Ngo replaced the Honourable Senator
McInnis (February 26, 2014).
The Honourable Senator Tkachuk replaced the Honourable
Senator Buth (February 26, 2014).
Published by the Senate of Canada
Available on the Internet: http://www.parl.gc.ca
27-3-2014
6:3
ORDRE DE RENVOI
ORDER OF REFERENCE
Extract from the Journals of the Senate, Tuesday,
March 25, 2014:
The Honourable Senator Gerstein moved, seconded by
the Honourable Senator Lang:
That the Standing Senate Committee on Banking, Trade
and Commerce be authorized to examine and report on the
use of digital currency including the potential risks, threats
and advantages of these electronic forms of exchange; and
That the Committee submits its final report no later than
June 30, 2015, and that the Committee retains all powers
necessary to publicize its findings until 180 days after the
tabling of the final report.
After debate,
The question being put on the motion, it was adopted.
Le greffier du Sénat,
Gary W. O’Brien
Clerk of the Senate
6:4
Banking, Trade and Commerce
MINUTES OF PROCEEDINGS
PROCÈS-VERBAUX
OTTAWA, Wednesday, February 26, 2014
(14)
OTTAWA, le mercredi 26 février 2014
(14)
[English]
27-3-2014
[Traduction]
The Standing Senate Committee on Banking, Trade and
Commerce met this day at 4:15 p.m., in room 505, Victoria
Building, the chair, the Honourable Irving Gerstein, presiding.
Members of the committee present: The Honourable Senators
Bellemare, Buth, Campbell, Gerstein, Greene, Hervieux-Payette, P.C.,
Maltais, McInnis, Mockler, Ringuette and Rivard (11).
In attendance: Adriane Yong and Brett Stuckey, Analysts,
Parliamentary Information and Research Service, Library of
Parliament; Mona Ishack, Communications Officer,
Communications Directorate of the Senate.
Pursuant to rule 12-16(1)(d), the committee proceeded in
camera to consider a draft agenda (future business).
It was agreed that senators’ staff be allowed to stay in the room
and that blackberries and cellular phones not be used.
At 4:20 p.m., the committee continued in public.
After debate, it was agreed that the committee adopt the
following draft legislative budget application for the fiscal year
ending March 31, 2015:
GENERAL EXPENSES
$ 6,800
TOTAL
$ 6,800
At 4:25 p.m., the committee continued in camera.
Pursuant to the order of reference adopted by the Senate on
Tuesday, December 3, 2013, the committee continued its
examination on the ability of individuals to establish a
registered disability savings plan (RDSP), with particular
emphasis on legal representation and the ability of individuals
to enter into a contract. (For complete text of the order of
reference, see proceedings of the committee, Issue No. 3.)
Pursuant to rule 12-16(1)(d), the committee considered a draft
report.
At 4:30 p.m., the committee adjourned to the call of the chair.
ATTEST:
ATTESTÉ :
27-3-2014
OTTAWA, Wednesday, March 5, 2014
(15)
[English]
6:5
OTTAWA, le mercredi 5 mars 2014
(15)
[Traduction]
The Standing Senate Committee on Banking, Trade and
Commerce met in camera this day at 4:18 p.m., in room 505,
Victoria Building, the chair, the Honourable Irving Gerstein,
presiding.
Members of the committee present: The Honourable
Senators Bellemare, Black, Campbell, Gerstein, Greene,
Hervieux-Payette, P.C., Maltais, Massicotte, Ngo, Ringuette,
Rivard and Tkachuk (12).
In attendance: Adriane Yong and Brett Stuckey, Analysts,
Parliamentary Information and Research Service, Library of
Parliament; Mona Ishack, Communications Officer,
Communications Directorate of the Senate.
Pursuant to the order of reference adopted by the Senate on
Tuesday, December 3, 2013, the committee continued its
examination on the ability of individuals to establish a
registered disability savings plan (RDSP), with particular
emphasis on legal representation and the ability of individuals
to enter into a contract. (For complete text of the order of
reference, see proceedings of the committee, Issue No. 3.)
It was agreed that senators’ staff be allowed to stay in the room
and that blackberries and cellular phones not be used.
Pursuant to rule 12-16(1)(d), the committee considered a draft
report.
After debate, it was agreed:
That the report be adopted with the changes as discussed
today;
That the Subcommittee on Agenda and Procedure be
authorized to approve the final version of the report, with
the changes as discussed today, and with any necessary
editorial, grammatical or translation changes required; and
That the chair be authorized to table the amended report
in the Senate, at the earliest opportunity.
At 4:45 p.m., pursuant to rule 12-16(1)(d), the committee
considered a draft agenda (future business).
After debate, it was agreed:
That the chair be authorized to seek authority from the
Senate for the following order of reference:
That the Standing Senate Committee on Banking, Trade
and Commerce be authorized to examine and report on the
use of digital currency including the potential risks, threats
and advantages of these electronic forms of exchange; and
6:6
Banking, Trade and Commerce
27-3-2014
That the Committee submits its final report no later than
June 30, 2015, and that the Committee retains all powers
necessary to publicize its findings until 180 days after the
tabling of the final report.
At 5:12 p.m., the committee adjourned to the call of the chair.
ATTEST:
La greffière du comité,
Danielle Labonté
Clerk of the Committee
OTTAWA, Wednesday, March 26, 2014
(16)
[English]
OTTAWA, le mercredi 26 mars 2014
(16)
[Traduction]
The Standing Senate Committee on Banking, Trade and
Commerce met this day at 4:15 p.m., in room 9, Victoria
Building, the chair, the Honourable Irving Gerstein, presiding.
Members of the committee present: The Honourable
Senators Bellemare, Black, Campbell, Gerstein, Greene,
Hervieux-Payette, P.C., Maltais, Massicotte, Ngo, Ringuette,
Rivard and Tkachuk (12).
In attendance: Adriane Yong and Brett Stuckey, Analysts,
Parliamentary Information and Research Service, Library of
Parliament.
Also present: The official reporters of the Senate.
Pursuant to the order of reference adopted by the Senate on
Tuesday, March 25, 2014, the committee began its examination
on the use of digital currency.
WITNESSES:
TÉMOINS :
Department of Finance Canada:
David Murchison, Director, Financial Sector Division;
Rachel Grasham, Chief, Financial Crimes - Domestic,
Financial Sector Division;
David Karp, Economist, Financial Crimes - Domestic,
Financial Sector Division.
The chair made an opening statement.
Mr. Murchison, Ms. Grasham and Mr. Karp each made a
statement and answered questions.
27-3-2014
At 6:10 p.m., the committee adjourned to the call of the chair.
6:7
ATTEST:
OTTAWA, Thursday, March 27, 2014
(17)
[Traduction]
[English]
The Standing Senate Committee on Banking, Trade and
Commerce met this day at 10:30 a.m., in room 9, Victoria
Building, the chair, the Honourable Irving Gerstein, presiding.
Members of the committee present: The Honourable Senators
Bellemare, Black, Campbell, Gerstein, Greene, Maltais,
Massicotte, Ngo, Ringuette, Rivard and Tkachuk (11).
In attendance: Adriane Yong and Brett Stuckey, Analysts,
Parliamentary Information and Research Service, Library of
Parliament.
Also present: The official reporters of the Senate.
Pursuant to the order of reference adopted by the Senate on
Tuesday, March 25, 2014, the committee continued its
examination on the use of digital currency.
WITNESSES:
TÉMOINS :
As individuals (by video conference):
Warren E. Weber, Economist;
Warren E. Weber, économiste;
Joshua S. Gans, Professor and Area Coordinator of Strategic
Management at Rotman School of Management, University
of Toronto.
The chair made an opening statement.
Mr. Weber made a statement and answered questions.
At 11:30 a.m., the committee suspended.
At 11:34 a.m., the committee resumed.
Mr. Gans made a statement and answered questions.
At 12:25 p.m., the committee adjourned to the call of the chair.
ATTEST:
6:8
Banking, Trade and Commerce
27-3-2014
RAPPORT DU COMITÉ
REPORT OF THE COMMITTEE
Wednesday, March 26, 2014
Le mercredi 26 mars 2014
The Standing Senate Committee on Banking, Trade and
Commerce has the honour to table its
THIRD REPORT
TROISIÈME RAPPORT
Your committee, which was authorized by the Senate on
Tuesday, December 3, 2013 to examine and report on the ability
of individuals to establish a registered disability savings plan
(RDSP), with particular emphasis on legal representation and the
ability of individuals to enter into a contract, now tables its final
report entitled: The Registered Disability Savings Plan Program:
Why Isn’t It Helping More People?
Respectfully submitted,
Le président,
IRVING GERSTEIN
Chair
(Text of the report appears following the evidence.)
27-3-2014
6:9
EVIDENCE
TÉMOIGNAGES
OTTAWA, Wednesday, March 26, 2014
OTTAWA, le mercredi 26 mars 2014
The Standing Senate Committee on Banking, Trade and
Commerce met this day at 4:15 p.m. to study the use of digital
currency.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon. I call this meeting of the Standing
Senate Committee on Banking, Trade and Commerce to order. It
is a pleasure to welcome back Barbara Reynolds, who will be
joining us as clerk for a period of time while our present clerk is
on maternity leave.
Today the committee is holding its inaugural meeting on the
use of digital currency, including the potential risks, threats and
advantages of these electronic forms of exchange.
Digital currency is clearly a timely and relevant topic. Hardly a
day goes by that there is not a reference of some kind in the news.
The goal of this first stage of hearings is to better understand the
subject matter before the committee.
As I mentioned yesterday in the Senate, no government to date
has defined what digital currency actually is, and this lack of
definition has led to much confusion on how to deal with it.
I think that United States Senator Thomas R. Carper,
Chairman of the Senate Committee on Homeland Security, put
it best when he said:
Virtual currencies, perhaps notably bitcoin, have
captured the imagination of some, struck fear among
others and confused the heck out of many of us.
Understandably, digital currency is attracting a lot of attention
from regulators, law enforcement, and investors and
entrepreneurs.
This afternoon, in an effort to give members and the viewing
public a better understanding of what digital currency is, we are
pleased to welcome, from the Department of Finance, Mr. David
Murchison, Director, Financial Sector Division; and also from
the Financial Sector Division we welcome Ms. Rachel Grasham,
Chief, Financial Crimes - Domestic, and Mr. David Karp,
Economist, Financial Crimes - Domestic.
Mr. Murchison and his colleagues have a presentation on
digital currency that will last approximately 30 minutes, after
which there will be an opportunity for senators to ask questions.
Thank you for being here today. Mr. Murchison, you have the
floor, sir.
6:10
Banking, Trade and Commerce
27-3-2014
David Murchison, Director, Financial Sector Division,
Department of Finance Canada: Thank you so much Mr. Chair
and committee members. You should have in front of you two
decks, one in English and one in French. We will subsequently be
providing full notes to you in both languages, which will largely
follow what I hope to speak to you today about.
To begin, you’ve asked for some discussion on virtual
currencies. I intend to try to answer some of those questions
through the course of the deck and subsequently. I should note
that we in my group are not experts, and here David Karp is,
perhaps, through his youth, best placed to answer many of the
technological questions you have before you. This is a rapidly
evolving topic and we are working hard to stay up with the
subject matter, frankly.
I would note that you are hearing from a variety of
stakeholders, including the Bank of Canada, so recognizing in
particular that the bank is in to see you, we’ve chosen not to
spend a lot of time on the currency aspects. We imagine they will
cover most of that topic for you.
That said, I propose on an overview basis to begin with
describing to you what a virtual currency is, what types of virtual
currency we see and quickly take you to what we think is
probably of most interest to you, and that’s bitcoin. That’s a
certain kind of virtual currency. Then we will speak about what
activities we are seeing in the virtual currency marketplace
broadly and what roles we see in those virtual currencies. Finally,
we’ll turn to advantages and disadvantages as we see them and
then taking you through our current regulatory framework and
how we see bitcoin and virtual currencies fitting in, and what gaps
we see in our framework today that we want to address in the
form of next steps in the near term.
If that all sounds reasonable, I propose to jump in on slide 3,
beginning with what is a virtual currency. I will try to do this in 30
minutes, but I actually fear I will be slightly over. Mr. Chair, you
should put your gavel down if I’m taking too long and ask me to
speed up.
Slide 3, what is a virtual currency, as I’ve noted this is a rapidly
evolving area. There are no universally agreed-upon definitions
here, and so part of the exercise for us early on is to describe to
you what we mean by virtual currency, and we choose to do that
in the next few slides. The topic, as I say, is quite broad.
Depending on the definition one uses, it can include both
electronic representations of national currencies as well as what
I will refer to as virtual currencies.
There are many electronic mediums of payments that are
digital, a digital form of national currency, for example, but not a
virtual currency. As examples we have prepaid access cards, wire
transfers and virtual or electronic cheques.
27-3-2014
6:11
As I have noted, the Bank of Canada folks are coming in, so we
don’t intend to go through a history of currency per se. We
imagine they will cover that issue for you.
Today we want to focus on virtual currency and how we mean
that term at the Department of Finance. By virtual currency we
are referring to a medium of exchange that meets the following
four characteristics that you see in that slide in front of you. First,
a virtual currency allows for value to be held in and exchanged in
an electronic, non-physical manner. Second, a virtual currency is
not what we call a fiat currency. It’s not, for example, the official
currency of the country; it is not the Canadian dollar. Third, a
virtual currency has the intended purpose of being exchanged
either for real or for virtual goods and services. Finally, a virtual
currency allows for its units to be transferred between individuals,
and we’ll come back to that point as a critical point later.
Slide 4, what types of virtual currencies do we see? We have a
variety of definitions here. One way of classifying virtual
currencies, however, is on whether or not they can be sold for
fiat currency or real money, and convertible virtual currencies can
be sold for real funds, so that’s dollars. Since they can be
exchanged for cash, they are relatively versatile, and indeed these
are really what I would posit should be the focus of this
committee’s interest.
Non-convertible virtual currencies cannot be sold for real
funds. They can only be used for the purchase of goods and
services. In many cases they can only be used to purchase virtual
goods and services that are contained in a game or virtual world.
Those of you who have children or grandchildren and they are
playing games in the basement, they may well be in a world where
they are buying and selling these kinds of things. Being nonconvertible, they are very limited.
Virtual currencies can also be classified on whether or not they
are administered by a central authority. Centralized virtual
currencies have a central authority overseeing the currency. The
central authority can be involved in verifying transactions,
determining the money supply and creating rules restricting who
can exchange or use the virtual currency.
The centralized model is used by existing methods of online
payments. For example, if you buy something with your credit
card online, the financial institution that issues your credit card
verifies with the merchant that you have the funds available to
buy the particular product you are interested in.
Decentralized virtual currencies, by comparison, have no such
central authority. These virtual currencies typically operate
through a peer-to-peer process where there is no trusted third
party to verify the transaction. Indeed, we’ll see that that’s what
we’re talking about when we talk about bitcoin. It’s a peer-to-peer
network.
6:12
Banking, Trade and Commerce
27-3-2014
Slide 5 is on convertible virtual currencies. These can be
exchanged for cash.
Senator Black: Mr. Chair, as we go along in this learning
phase, if we have any questions, is it appropriate to ask them now
or would you wish us to wait?
The Chair: I don’t want to take him off the track that he’s
leading us through. Perhaps it might be helpful to let
Mr. Murchison go through the entire presentation, if you
wouldn’t mind, Senator Black.
Senator Black: Of course not.
Mr. Murchison: Since these virtual currencies can interact with
the non-virtual world and have real world socio-economic effects,
we are much more concerned about the convertible types. Again,
we come back to the fact that it is the convertible ones we’re more
interested in.
Virtual currencies that we might note include the defunct
Liberty Reserve dollar, which you may have heard of; Pecunix,
which is a virtual currency that purports to be backed by gold;
and Linden Dollars that are used in an online world called Second
Life, which is frankly unknown to me.
On the other side, slide 6, non-convertible virtual currencies
cannot be sold for real funds. They can only be used to purchase
goods and services. In many cases they may only be used to
purchase virtual goods and services — goods and services
contained inside a video game or a virtual world. Examples
here include something called Simoleons currency, which is used
in a video game called The Sims, which again I regret to say I have
not played and is unfamiliar to me. However, it is a currency
within the gaming world.
Another non-convertible virtual currency is in the World of
Warcraft, which you may have heard about. That is a well-known
online game we’ve noted here. Again, most of this is within the
video gaming world.
As we look at slide 7, centralized virtual currencies, this is the
case where a centralized virtual currency has a single authority
that is responsible for overseeing the virtual currency, that, as we
noted before, is involved in verifying the transactions,
determining the money supply and creating rules restricting who
can exchange or use the virtual currency. The centralized model is
the model that most of us would be familiar with as we think of
online payments, such as credit card transactions, Interac and so
on and so forth.
Again, as we noted before, if you use your credit card, your
financial institution issues the credit card to you verifying to the
merchant that you have the funds available to buy that product.
27-3-2014
6:13
Slide 8 is on decentralized virtual currency. Again, this is
probably of most interest to you. These currencies typically
operate through a peer-to-peer process. With bitcoin, for
example, there is no centralized authority that verifies that a
person wanting to send funds actually has enough bitcoins to
spend. Rather, when one makes a transaction here, they
broadcast that transaction to the entire network of users and
the transaction is recorded in a very large ledger, which
continually gets bigger and bigger, otherwise called a block
chain. These transactions are verified through a process called
mining, which is also used to create new coins and increase the
money supply. This money supply in the case of bitcoin is
determined by a mathematical formulation, so there is no central
authority that could print more bitcoins if it wanted to do so.
There are other examples of virtual currency that we have noted.
One is litecoin, which operates similarly to bitcoin.
Slide 9 just summarizes the previous slides into a chart form
and shows you the intersection with convertible, non-convertible,
centralized, decentralized. You will note that there are no
decentralized, non-convertible currencies that we could point to
here, and, as we’ve mentioned, it’s the decentralized, convertible
currencies that are of most interest to us. I’ve put a circle on that
chart around bitcoin, which we will spend a bit of time talking
about in the coming slides.
Slide 10 shows that the best known of the virtual currencies in
our work is bitcoin. Bitcoin is both a network protocol and a unit
of virtual currency. So big B ‘‘Bitcoin’’ is the network; little b
‘‘bitcoin’’ is the currency. Here is something that is actually widely
agreed to in this world, which is a bit unusual, frankly. Most
people agree that these virtual currencies are a decentralized peerto-peer network that allows for the proof and transfer of
ownership without the need for a trusted third party. From
there we have lots of divergence, but that seems to be a broadly
accepted definition.
It has two features under that. Money supply is controlled and
transactions are verified through mining; and transactions are
recorded in a block chain, which is a massive transparent ledger.
The unit is bitcoin, as we said, and it is convertible.
To give you a sense of the activity, on slide 11 we have some
statistics for you. Bitcoin market capitalization is where we have
taken the outstanding number of bitcoins and what its current
daily market value is. That would give you a number like $8.4
billion, which would be a good-sized company were it to be a
company. It would certainly list on a senior exchange. It would be
substantially less than Apple, which has market capitalization of
$490 billion; nonetheless, these are big numbers.
6:14
Banking, Trade and Commerce
27-3-2014
There are about 100 exchanges globally, of which we have
about 10 in Canada. The world’s first bitcoin ATM went into
Vancouver in November 2013, as I see from the notes here. Since
then we have had a number of other Canadian cities, including
Ottawa. I am not sure where it is, but David Karp could tell you
where the bitcoin machine is in Ottawa if you are interested in
transacting there. A number of Canadian cities have followed
suit. Most exchanges are either a stock exchange style or a
currency exchange style.
We find about 1,500 merchants globally who are prepared to
transact with bitcoins; some 200 are listed in Canada. It is most
commonly used for online gambling as a currency, but it is
popular with online retailers, particularly in the tech sector. You
will see that we have put a couple of names there for you:
Overstock.com, which is a popular site; Wordpress; Zynga; Tesla,
which is the electric automotive company; and Virgin Galactic,
which I suspect is mostly about marketing.
We have seen a proliferation of virtual currency-related
businesses. These include payment processing services, prepaid
cards, consultants, legal services and special interest groups
promoting virtual currency usage.
Slide 12 is next. Virtual currencies are borderless in nature and
transacted online. When you look at a particular transaction, we
don’t know what country the transaction took place in nor what
nationalities the parties are. As such, it is difficult to get an
indication of the amount of virtual currency activity directly in
Canada. However, we can say that it is a topic of great interest. I
get a lot of calls on it. It would be one of the number one media
calls coming into the department these days. It tends to ebb and
flow, but it would certainly be one of the top three coming in these
days.
We note that the Canadian Virtual Exchange, which is one of
the major virtual currency exchanges in Canada, claims to have
traded more than $80 million worth of virtual currency to date,
although that is a small figure if you compare it to foreign
exchange numbers. Daily foreign exchange turnover is many
billions of dollars.
There are a couple of other things to note. The ATM that we
mentioned before in Vancouver processed roughly $1 million in
transactions in its first month of operations. This is a machine
that takes in cash and spits out bitcoins. That is a reasonable
amount of cash if you think about it. These are not machines that
are hooked up to a payment network. So it’s not hooked up to a
bank or to Interac; it is only taking cash.
Senator Hervieux-Payette: Do you have a bitcoin with you so
that we can see it?
27-3-2014
Mr. Murchison: In the back of your deck, I think on page 26 in
the annex, we have a receipt for a bitcoin. That actually shows a
transaction between two of my staff: one who is sitting at the back
of the room and one who is sitting to my left. Jonathan is sitting
in the back of the room. They sent a very modest amount of
bitcoin to one another through a company called VirtEx, which is
affiliated with Larry O’Brien. We were having a chat about —
The Chair: The former mayor of Ottawa.
6:15
Mr. Murchison: Yes, the former mayor of Ottawa who is now
in this business and who expressed some interest in talking to the
committee about that business.
The Chair: We do no advertising on this committee. We must
be very cautious.
Mr. Murchison: That is probably the best example.
There are coins, but they are really just facsimiles of the same
information put into a coin format.
Senator Tkachuk: It is a great business if you can get away with
it, right? Throw in cash and I will give you bitcoins, right?
Mr. Murchison: And the reverse, although I am not sure how
much of the reverse goes on.
The Chair: You are doing very well, Mr. Murchison. Keep it
up. You have our interest.
Mr. Murchison: The last bullet notes — and this speaks to the
cash point, too — that we have seen some evidence that
Canadians were likely using bitcoins for illicit activity. An
academic study looked at products for sale on Silk Road —
and you may have heard about this — which is a now defunct
marketplace for illicit goods that accepted bitcoin as its payment.
It found that Canada was the fourth most common country of
origin for items listed on Silk Road after the U.S., U.K. and the
Netherlands. That is a cause for concern.
I would like to spend a bit of time on slide 13 because I think it
is an important slide. It is about the role of virtual currencies.
There are really three facts that you might hear about as you read
commentary on this. The first plays to its potential role as a
currency. We have noted — and I imagine the bank will speak to
this point further — that virtual currencies have a potential role to
play as a currency. Currency is a generally accepted form of
money. The Currency Act defines the monetary unit as the dollar.
If virtual currencies continue to be widely accepted as a method of
payment for goods and services as well as a stable store of value
— the two key terms there are ‘‘widely accepted’’ and ‘‘stable store
of value’’ — then they might become more widely used as a
6:16
Banking, Trade and Commerce
27-3-2014
currency. However, I would say that we are a bit of a way off
from that world.
Virtual currencies can also function as a commodity. Many
people have chosen to invest in virtual currencies. As I have noted
before, we see a market value of $8.4 billion. Indeed, a lot of
people have made money on that. They are being put into some
asset managers’ books as a speculative way to make money in
much the same way that commodities such as zinc, copper or gold
might be speculated on. That is another way to think about it. I
have put in the words there ‘‘as an asset to invest in.’’
That is an area that is worth your attention, I think. Indeed,
there has been some speculation that shortly an ETF will be
launched on virtual currencies. That, of course, will bring a
regulatory forbearance down on it.
Senator Greene: An ETF?
Senator Massicotte: Exchange-traded fund.
Mr. Murchison: An ETF is an exchanged-traded fund. Thank
you.
Virtual currencies may also function as a value transfer system
much like an inner bank wire transfer system or proprietary
system such as Western Union, which some of you may have used
to transfer funds either domestically or internationally. It is a
popular way to do so. My father has a war-time pension in the
U.K., and we use that service to transfer U.K. pounds into his
bank account in Canada. We use a money services business for
that transaction. Bitcoin provides a mechanism to do that, and it
holds some promise for doing so on a much cheaper basis than
transferring through banks or money services businesses.
The government’s role is shaped by all of those aspects that we
touched on there, and we will return to some of them as we look
forward.
In slide 14 we look to the potential advantages and
disadvantages of this. It is important to recognize that virtual
currencies do have benefits. Many of you will have looked at
some of the disadvantages. On the positive side, they have
relatively low transaction fees, so this can be very attractive to
merchants who today are faced with high credit card costs, for
example.
Senator Ringuette: Yes. I totally agree with you.
Mr. Murchison: I would note that while it would be close to
zero transaction costs peer-to-peer if I were to send David
something over the network, to convert it into currency there is a
27-3-2014
6:17
transaction cost. Today that is around 1 per cent, so not zero, but
still below what typical credit card costs are although a bit higher
than what might be thought of by some people.
It can provide a very cost-effective mechanism for remittances.
For example, you may have heard that the Philippines takes a lot
of remittances from North America. This would be a potential
cost-effective mechanism for sending those remittances in a much
cheaper way. They have the possibility to provide consumers and
merchants with greater payment choices and, as some of you may
have noted, additional competition into the payments
marketplace. I think there is an important innovation aspect to
this.
Virtual currencies also provide irreversible payments.
Depending on your perspective, that can be a terrific thing or
not such a terrific thing. Credit card payments, for example, can
be reversed because of fraud. This is called a charge-back. Some
people like it, some people don’t, depending on which side of that
transaction you are on. It does have a cost attached to it of
something like 30 basis points.
Much has been made in the media of illicit transactions with
virtual currencies. As we have noted before, however,
interestingly, this is in some ways the most transparent network
you can imagine. All transactions are recorded on a ledger which
everybody can see. While people note that much of this is
anonymous, it is actually a pseudonym that people are using
perhaps on the block chain. If you are trying to access that
through an email account, for example, that is fully traceable. It
would be hard to mask yourself in accessing money out of this
network.
We have noted the vehicle for innovation, which is the last
point I would point to on the advantages side.
On the disadvantages side, there is no surprise: very vulnerable
to exploitation for money laundering or terrorist financing. Some
of you, I think, were thinking of cash going into a vending
machine. That is obviously one place to look. We know there is
lots of documentation on currencies being used in illicit
transactions to purchase illegal drugs; Silk Road was a
prominent one. While it is nice to be able to send money back
home cheaply, it is all pretty convenient for terrorists to use the
same vehicle, and drug traffickers as well. We do have this issue of
‘‘pseudo-anonymous,’’ as we use it here.
I would note two other prominent disadvantages. One is
around the area of consumer protection. They are not well
understood. Many people are stepping into this not
understanding the full perils. Virtual currencies are subject to
6:18
Banking, Trade and Commerce
27-3-2014
cyber theft. Hackers can steal virtual currencies in the same way
that they can hack into your computer. You may have heard
reports about Mt. Gox recently, a large bitcoin exchange which
had quite substantial hacking and stolen property.
Bitcoins are not subject to deposit insurance, of course, and
they are subject to massive volatility. In January 2013, one bitcoin
was about $13; one year later it was $745; at one point last year it
was $1,300. As a medium of exchange, it has volatility attached to
it.
The final point you will see there is a relatively lengthy
transaction verification process. While we noted that relative to a
credit card payment it would be much less, a credit card payment
is, nonetheless, quite quick. A transaction on bitcoin can take up
to 10 minutes as it grinds through a verification of that long
chain. That might not matter for money that you are sending
from one country to another; it might matter a lot at
Christmastime if you are standing and paying for presents. That
is an issue.
The next section I would turn to is, how do we think about this
within our regulatory framework? As we turn to that area, we
think about it from a number of perspectives. One is our currency
legislation; another is anti-money laundering — we have talked to
this committee in the past about that — consumer protection;
taxation; and payment system oversight.
I would like to turn to each of these individually, if I could. I
am already over my time, I see.
The Chair: Please continue.
Mr. Murchison: Okay. On the currency side, the Currency Act
defines the monetary unit of Canada as the dollar, of course. The
act contains provisions governing legal tender and currency,
defines what constitutes a current coin or note in Canada. We
have both the Royal Canadian Mint under this and the Bank of
Canada: one for coins and one for notes. None of these laws,
currently anyway, applies to or restricts the use of virtual
currencies in transactions in Canada.
In the same way, I would point out that some of us continue to
get Canadian Tire money. If there are merchants who choose to
take my Canadian Tire money, we don’t stand up and say they
can’t do that. Similarly, if people want to use U.S. dollars, so be
it.
27-3-2014
6:19
On the anti-money laundering and terrorist financing, we have
an act called the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act, PCMLTFA for short. That’s the
legislative basis that we have for Canada’s anti-money
laundering and terrorist financing regime. This act regulates a
number of financial and non-financial entities, from banks and
securities dealers to casinos and real estate agents. I think this
committee is largely familiar with this work.
I would point to money services businesses in particular, as we
think about bitcoins. That includes foreign exchange dealers,
businesses that transmit funds, and issuers and redeemers of
travellers cheques. The activities of money services businesses are
similar to virtual currency exchanges. Virtual currency exchanges,
however, are not considered money services businesses under the
existing legislation, but we’ll come back to this as we look at what
we’re doing, as announced through Economic Action Plan 2014,
where we have made some steps forward on this.
FINTRAC, which you know of, the Financial Transactions
and Reports Analysis Centre of Canada, our financial intelligence
unit, receives reports from these entities it regulates, relating to
suspicious transactions related to money laundering. As you
probably know, money services businesses must register with
FINTRAC. They have to identify their clients and keep records
for us.
This is a legislative framework that is consistent with
international standards and provides key tools to help detect,
deter and prevent money laundering. As I say, I’ll come back to
that in a minute.
Finally, we look at consumer protection. This is on slide 18.
We would look at products and services offered by federally
regulated financial institutions. We have noted that virtual
currencies are not subject to deposit insurance. Virtual
currencies represent a risk to consumers because they can be
subject to large changes in value and are vulnerable to cybertheft
if they’re not stored securely. Users should exercise extreme
caution.
With respect to taxation issues, the CRA has offered public
guidance on how virtual currencies are treated under the Income
Tax Act. The exchange of virtual currency for goods and services
is considered to be a barter transaction and, as such, is taxable.
Yesterday, the IRS in the U.S. issued a notice that declared
that virtual currencies are considered property as opposed to
currency for tax purposes. Basically they are fully captured, as far
6:20
Banking, Trade and Commerce
27-3-2014
as I can tell from our read of it. If they are bought or sold as a
commodity, profits are taxed for income or capital gains,
depending on the circumstances.
Finally I would note that the federal government has broad
oversight of and responsibility for Canada’s payment system. In
this respect, virtual currencies represent an innovation that could
bring potential benefit to consumers and merchants, which I
discussed earlier.
On slide 19, we note that it’s not just the federal government
that has a role here but provincial governments as well. Securities
regulators are starting to look at these issues. In Quebec, the
Autorité des marchés financiers issued an alert about bitcoin in
February. They warned about fraud risks, as well as the fact that
virtual currencies are not covered under Quebec’s financial
services compensation fund or under its deposit insurance fund.
I’m quite sure that the other securities regulators in Canada will
start to issue similar warnings as they wake up to these issues.
There are a number of approaches internationally, and I think
this committee would find some of them quite interesting as you
delve into this. Many are, frankly, studying the issue. They
haven’t concluded what to do yet. They continue to ponder, and
we put ourselves in that camp until quite recently. Some have
issued public warnings; some have adopted anti-money
laundering and anti-terrorist financing regulation. That would
be the U.S., for example, FinCEN, which I think this committee
would be familiar with. In March 2013, FinCEN, the Financial
Crimes Enforcement Network in the U.S., the equivalent to our
FINTRAC, issued guidance that clarified that persons and
entities engaged in certain virtual currencies activities are
considered to be money services businesses with anti-money
laundering and anti-terrorist financing obligations.
Earlier this month, Singapore also announced a plan to
regulate virtual currencies through the intermediaries like the
exchanges. Some countries have also issued prohibitions on
certain virtual currency activities. In China, perhaps no surprise,
the government has prohibited banks from trading in virtual
currencies at all.
Annex 3 of my presentation provides some references for you.
There is a paper there entitled Regulation of Bitcoin in Selected
Jurisdictions, which we found to be a very helpful document. I
might encourage you to at some point read that. It provides a
good overview of various approaches to virtual currencies in more
than three dozen countries.
27-3-2014
6:21
On the second-to-last slide, slide 20, I want to say what we are
doing, our next steps. In Economic Action Plan 2014 we have
committed to two important initiatives which were announced in
the recent budget.
First, we announced the development of a comprehensive, riskbased approach to the oversight of the Canadian payments
system and the government’s intention to consult publicly on the
oversight of the retail payment system specifically, including
virtual currencies, this spring. That’s one of my responsibilities.
We will be seeking to go out with a consultation paper which,
among other things, will seek to address how we should be
thinking about virtual currencies and how we should be thinking
about regulating, if we should be regulating at all, these currencies
— if you like, the perimeter of regulation. As we think about our
payments system, we don’t capture them in today’s regulatory
framework.
Second, the economic action plan announced the government’s
intention to introduce legislative amendments and new
regulations to strengthen Canada’s anti-money laundering and
anti-terrorist financing regime. These amendments include
emerging risk such as virtual currencies, including bitcoin.
These proposed regulations would extend the act’s requirements
for money services businesses to entities in the business of dealing
in virtual currencies.
We would aim, in these regulations, to cover virtual currency
exchanges, but not individuals or businesses. We think that this
approach will allow for financial innovation, which we see to be
one of the interesting markers behind this. Again, there will be an
opportunity for public consultation on both these initiatives.
Finally, as we think about this, as I think I noted at the
beginning, this is a rapidly evolving marketplace in virtual
currency. We’re running hard to try to keep on top of it and
will continue to monitor and respond to market developments
and also to your questions.
In conclusion, I thought that I might provide our take, if you
will, on what commentators and analysts are saying about
bitcoins specifically. We have noted three ways that people are
thinking about these currencies.
As a currency, there is skepticism of using it as a currency for
the long term. That’s particularly because of its volatility and its,
frankly, not yet widespread use. As a commodity it continues to
have some interest, but it has significant investor issues. It will be
interesting, for example, if they are able to have an ETF come to
the market. I think that will be a challenging thing to do, but we
will follow those developments.
It’s a little too soon to say how it will fare as a commodity, but
as a payments innovation, we think there are some interesting
lessons there and that there is some potential that we will follow
with interest.
6:22
Banking, Trade and Commerce
27-3-2014
Mr. Chair, that would conclude our early views on what is a
broad and deep topic and one that we’re not experts in, as I say.
The Chair: Mr. Murchison, I know I speak for every member
of the committee when I say that those were outstanding opening
comments, and we greatly thank you for kicking off our study on
this subject.
If I may step back a bit and ask you this first question, do you
think virtual currencies are going to grow and thrive, or do you
think perhaps we’re witnessing a passing fad?
Mr. Murchison: The number of calls that I’m getting and from
the interest we’re seeing in the marketplace — I’m relatively
recently into my job but David Karp would spend some portion
of every day following this — all of that has done nothing but go
up in the past year. There has been more, not less, and I have no
reason to think that that will diminish.
Senator Tkachuk: What creates the demand for the virtual
currency? You can use American dollars basically worldwide in
exchange for products, goods and services. What created the
demand for the bitcoin?
Mr. Murchison: I’ll look to my colleagues if they have a better
answer, but I think it’s been driven by a number of things. One is
as a mechanism for payment and transfer of value at zero cost.
That’s one aspect of it. Much of the early work, frankly, was done
by what I would categorize as libertarian people who were seeking
to avoid government, if I can put it that way. The mythological
individual who invented bitcoin did so, as far as I can tell, in part
for those libertarian values of getting out from under government
and the government’s thumb on the money supply.
Senator Tkachuk: It is a creative thing.
Mr. Murchison: A very creative thing.
Senator Tkachuk: It’s a supply side thing almost.
Mr. Murchison: Correct.
Senator Tkachuk: You build a TV set and there is no demand,
but you build it and somebody buys it.
Mr. Murchison: That’s right.
David, would you add to that?
David Karp, Economist, Financial Crimes - Domestic, Financial
Sector Division, Department of Finance Canada: I think that
covers it off pretty well. It started on the supply side — you are
right — where individuals who had a libertarian philosophy
would want to use these virtual currencies. Then, because they
want to use them, you see merchants uptake because they are
happy to receive this form of payment, because it’s revenue for
them. As the supply side picks up, the merchant side is also
picking up.
27-3-2014
6:23
Senator Tkachuk: I was thinking about this because of our
discussion here, sort of like points. We kind of have currency in
points with AMEX or Aeroplan, all of these different cards. We
actually take these points and buy stuff with them. They are
stored virtually and digitally. You just process them and you
don’t know where it goes. I know where it comes from. Someone
is issuing it.
Who is issuing this? When I buy, say, an airplane ticket and I
receive so many points, or on a credit card I receive so many
points, a decision is made. Someone is making a decision about
how much to issue. Who decides how many bitcoins to issue? If
you issue too many, it will have no value. How is that decision
made?
Mr. Murchison: I will let David answer that question because
it’s about mining and the fact that one of the attributes the earlier
adopters liked was that no one had a thumb on the money supply,
and there is a finite amount of bitcoin that is available. David will
take you through how that works.
Mr. Karp: It is essentially an algorithm for the decentralized
virtual currencies that have no central authority. It is
predetermined by an algorithm. It’s predictable. People who use
the currency know how many units are going to be issued. I
believe it will cap out at 21 million bitcoins, if I’m not mistaken.
The new bitcoins are issued as transactions are verified. They’re
essentially a reward for people who have successfully verified
transactions, to give people an incentive to verify bitcoin
transactions.
Senator Tkachuk: I’m trying to understand it.
Mr. Murchison: One of the reasons the transaction takes the
10 minutes that it does is because of the computing power to
verify the transaction through a long chain of previous people
who have transacted, and that’s done through a network of
people. To incent that network of people to verify that
transaction, they are compensated by getting a bitcoin, which is,
if you like, mined. That is the process.
Senator Greene: There are 21 million of them. Within the
21 million, each time there is a transaction and new bitcoins are
generated, they are generated with respect to the cap, so what
you’re receiving is a slice of the total; is that right? More slices?
Mr. Karp: Not exactly. The 21 million is the maximum that
will be reached, and we are not there today. Today we are in the
neighbourhood of 15 million bitcoins or so. You actually do get
new bitcoins when you successfully verify transactions. You
would get, I believe, 25 bitcoins right now if you successfully
verified a transaction.
Senator Ringuette: Can we go to your slide 26 and the example
there? Am I to believe that 0.27 bitcoin is equal to C$186?
Mr. Karp: That’s correct, yes.
M. Karp : Oui, c’est exact.
6:24
Banking, Trade and Commerce
27-3-2014
Senator Ringuette: That’s correct. So not only does it have its
own value market, it also assigns a value to a regulated currency,
Canadian dollars.
Mr. Karp: The dollar figure there shows what people are
willing to pay for a bitcoin on bitcoin exchanges. I’m not sure
which exchange that number comes from, but bitcoin doesn’t
specify what its price is. It is really dictated by supply and
demand, and it depends on the price people are willing to buy and
sell it at on an exchange.
Senator Ringuette: In this example on slide 26, the people who
were willing to exchange 0.27 bitcoin were willing to exchange it
for C$186; is that right?
Mr. Karp: That’s correct, yes.
Senator Ringuette: For instance, a merchant selling, let’s say, a
barbecue will say, ‘‘Okay, it’s online. You can buy it for C$270 or
0.30 bitcoin.’’ Would that work like that? Because then the
merchant will be setting the exchange rate —
Mr. Karp: Yes.
M. Karp : Oui.
Senator Ringuette: — not the system.
Mr. Karp: It would work like that in many circumstances.
Some websites would only sell products denominated in bitcoin
and would not accept other currencies, but many merchants
would accept both and they could set the price in either currency.
Senator Ringuette: I know everyone wants to question. Does
this have potential to become universal currency then?
Mr. Murchison: Given the length of presentation, I omitted a
description of how bitcoin works in the process of a transaction,
but given the questions I wonder if I might take a few minutes to
read it? I think that would clarify some of these issues.
Senator Ringuette: Can you just answer if it has the potential to
be a universal currency?
Mr. Murchison: Sure, yes, I think it has potential.
A bitcoin isn’t a file. It’s not something that can be
downloaded or deleted from your computer. In that sense, it’s
abstract. A bitcoin is just a number that is associated with a
bitcoin address, which is a little bit like a bank account.
Bitcoin, as we’ve noted, uses a decentralized peer-to-peer
network that allows for the proof and transfer of ownership
without the need for a trusted third party. This network facilitates
the verification of transactions, which is one of bitcoin’s most
innovative characteristics. It is important to be able to verify
transactions to ensure that once someone sends a bitcoin to
another person they don’t try to double-spend that same bitcoin
by trying to send it to a second person. With traditional
payments, this verification is done through a central authority.
27-3-2014
6:25
For an online payment, like a bill payment, my bank verifies to
the payee that there are enough funds in my account to pay the
bill. With the bitcoin, the verification process is decentralized.
When I send a bitcoin to someone else, I broadcast that
transaction to everyone else who uses bitcoin. It’s like posting a
transaction on a public bulletin board for everybody to see.
Because all the transactions are public, you can see the history of
each bitcoin to ensure it is not double-spent. This is the true
technological innovation behind bitcoin, its ability to cut out the
traditional middlemen — including governments, by the way —
that have traditionally played a role in the payment system by
performing such functions as verifying payments, determining
money supply and creating rules of use. These middlemen
typically add to the cost of payments, so by eliminating the
middlemen, decentralized virtual currencies can lower the
payments and their cost.
Mining, which is the point we’re getting to, is also an important
part of the transaction process. Computers involved in the mining
process solve math problems to ensure that the private keys for
each bitcoin are legitimate. Once the math problem is solved, the
transaction is verified and is included in the public record for all
bitcoin transactions.
This brings me to another interesting point, which is how
transactions can be tracked. All bitcoin transactions are publicly
recorded and you can view them online. You can type in any
bitcoin address, which is a little like an account number, and you
can see all the transactions associated with that bitcoin address. A
bitcoin address is nothing more than a collection of letters and
numbers, so often you don’t know what person is connected with
a particular address.
Some people post bitcoin addresses on the Internet if they want
to raise money. You see charities doing this. If you’re sending
bitcoins to someone you must know their address, thus in some
cases it’s possible to link a bitcoin address to a particular person
or business. That’s why these bitcoins are considered to be
pseudo-anonymous. As noted before, there is more transparency
in the bitcoin transaction than in most other types of payments,
and certainly much more than cash payments.
I don’t know if there is anything else I would say here. A
bitcoin is convertible, which is why we are interested in it into
Canadian dollars. I don’t know if that helps a bit; it may just pose
more questions on it.
Senator Tkachuk: I have a bit of a supplementary on the math
equation. If you have one bitcoin worth $186, and you are buying
something worth around $100, what is the exchange? Here we give
back change. How do you give back change in a bitcoin? Do you
have fractions in a bitcoin and it’s marked that way on the
transaction?
6:26
Banking, Trade and Commerce
Mr. Murchison: You will see on slide 26, the fraction of a
bitcoin, 0.2766.
Senator Black: Thank you for that helpful presentation.
I would like to start with the assumption I’m making, as this is
our first go at this. This is the assumption I’m going to make
unless you correct me. I will assume that virtual currencies are
reality that will enhance, not diminish, and our challenge is to
figure out how to protect, regulate and tax them. Do you agree
with that analysis?
Mr. Murchison: Would you mind repeating that?
Senator Black: I’m questioning whether or not I should assume
that virtual currencies are a reality. The genie is out of the bottle.
Mr. Murchison: Sure. That’s fair.
27-3-2014
Senator Black: If that’s the case, our challenge is figuring out
how to, among other things, protect consumer protection,
regulate and tax?
Mr. Murchison: That’s broadly right. Our interest is perhaps
whether they should be regulated.
Senator Black: Lots of questions around it all.
Mr. Murchison: I don’t think it’s necessarily that they will be
regulated. We have identified, certainly in our anti-money
laundering and anti-terrorist financing legislation, that they
should be captured at least on the money services business side.
But at the same time, I’ve tried to highlight to this committee
some of the innovative aspects, which I think frankly should be
promoted for a more competitive economy.
Senator Black: This is helpful so we can set the rules of
engagement. But if I took the initial assumption of ‘‘Look we’ve
got to stop this wave right now,’’ you would look at me and say,
‘‘What are you thinking?’’
Mr. Murchison: I think there are enough advantages to suggest
to you that we should not automatically jump in and regulate.
Senator Black: Thank you very much. I have three specific
questions on your deck, if that’s appropriate.
In respect of the description you gave on pages 4 and 8, I think
I understood — and could be wrong — that the transactions
between parties are not able to be certified or verified. My very
rudimentary understanding was that there is, in fact, a way
through miners to verify a transaction. Did I misunderstand what
you said?
Mr. Murchison: They are verifiable, and that’s the central
ledger, which is really central.
Senator Black: That is very important.
27-3-2014
Mr. Murchison: Very important.
6:27
M. Murchison : Effectivement.
Senator Black: There is a way somehow to capture this and
therefore potentially regulate, expose or recognize that there are
problems. I wanted to understand that point.
Mr. Karp: I think the distinction on slides 4 and 8 was between
the centralized and decentralized virtual currencies. It depends
who verifies it. With the centralized virtual currency there is a
central authority that verifies it, and with the decentralized virtual
currency, it’s the network. It’s everybody who is using it, the
miners that verify it.
Senator Black: There is a verification?
Mr. Karp: The verification occurs in both cases.
Senator Black: I wanted to make sure I didn’t misunderstand
that.
Can you talk to us for a moment about the role of an exchange
here? I’m referring to slide 11. I understand a stock exchange and
how that works, but what is the role of an exchange in this world
with the virtual currency?
Mr. Murchison: It’s really playing the same role that a stock
exchange plays or a foreign exchange plays. In this case it’s
converting bitcoins into fiat currency — Canadian dollars.
Senator Black: The only time I would use an exchange, or
anyone would use an exchange, is to convert bitcoins to currency
or vice versa?
Mr. Karp: Yes, more or less. You can exchange other types of
virtual currency besides bitcoin, and I believe there are some
exchanges that allow you to exchange one type of virtual currency
for another, but more or less, yes.
Senator Black: When you say there are 100 globally, are these
exchange facilities?
Mr. Murchison: They are almost all virtual exchanges. It’s not
like a stock exchange floor of old.
Senator Black: I have a technical question on slide 21. How
could a bitcoin be a commodity of any value if it wasn’t used as a
currency? How are those two points separated? You’re saying that
as a currency there is skepticism on its long-term viability, fine,
but perhaps there is value as a commodity because of significant
investor issues. How could it be a commodity if it didn’t have a
use?
Mr. Murchison: A commodity as in an asset that one might
imagine buying, much like one might imagine buying gold or zinc
or silver.
6:28
Banking, Trade and Commerce
Senator Black: What if the commodity had no use? In other
words, if it wasn’t a currency it wouldn’t be a very valuable
commodity.
Mr. Murchison: Correct.
27-3-2014
Senator Black: Are you aware of Khan University lectures on
bitcoin?
Mr. Karp: I’ve heard of Khan University, but I wasn’t aware
they had any lectures on bitcoin.
Senator Black: You might check those, and if you thought they
had value I’d recommend them to the committee. You sit down
with your iPad and there is a very clear person talking about the
properties of bitcoin; it is really helpful. However, I would like to
know whether you would bless it. If you bless it I’m going to
recommend it to the committee. I did it and I thought it was
interesting and I understood it more or less.
The Chair: We’ll ask the clerk to receive the information to that
effect.
Senator Black: My office can point this out, and it might be
helpful to the committee. You might have a look though, too, and
if you think it’s not helpful or baloney you should let us know
that.
[Translation]
Senator Hervieux-Payette: You mentioned a number of names.
Besides bitcoin, are there other names associated with game
currencies? In other words, are there other names used only for
games, electronic games that youth play, and nothing else? Are
bitcoin and litecoin the only ones that have monetary value and
can be exchanged for money? Do the others, like Liberty Reserve,
have monetary value?
[English]
Mr. Karp: Any virtual currency that is convertible can be
converted back for fiat currency, be it Canadian dollars, U.S.
dollars, et cetera. Those currencies, Linden Dollars, Pecunix —
Liberty Reserve is now defunct — could absolutely be converted
back into real currency, so they have a monetary value attached
to them.
[Translation]
Senator Hervieux-Payette: It is not worth billions like bitcoin.
It is less, right?
Mr. Murchison: Yes.
Senator Hervieux-Payette: There is the taxation issue, the GST
in particular, payable on the purchase of goods and services. Are
AIR MILES reward miles taxable?
27-3-2014
[English]
Mr. Murchison: Honestly, senator, I actually don’t know the
answer to the question, but in any case I would be inclined to
duck it.
[Translation]
6:29
Senator Hervieux-Payette: In bitcoin transactions, that would
be the first major advantage for bitcoin users, since the GST, and
the QST in Quebec, is charged on goods and services.
I come from a small community. When I was young, the doctor
came to people’s homes to deliver babies. His fee was two
chickens. So I was thinking that this is a bit like the good old
days. People do not have to pay taxes; that is where the benefit
lies.
You said there are benefits from an innovation standpoint.
Will the G20 look at this issue to find an international formula
that could work, since right now it is all over the map?
[English]
Mr. Murchison: I’m not aware of this being on the G20 agenda.
It’s certainly an active agenda item on the FATF, the Financial
Action Task Force, internationally, but that’s the only forum I
know of where it’s had much currency.
[Translation]
Senator Hervieux-Payette: What about the OECD?
Mr. Murchison: No.
M. Murchison : Non.
Senator Hervieux-Payette: That is a bit surprising. If I am in
Italy and I buy something worth 250,000 lira, that is not worth
much, while I would have how much in bitcoin? Say
0.0010 bitcoins, because every currency has a different value.
Does bitcoin change in value depending on the country? When we
exchange Canadian money for euros or American dollars, we get
88 or 90 cents American and $1.53 for a euro right now, so how
does it work if I want to buy, say, a work of art in Europe? Will
they give me a price in bitcoin?
[English]
Mr. Murchison: If you were in Italy you would go to an
exchange in Italy, and if you wanted to convert to a local currency
they would give you a price to do that in the same way that we’ve
quoted to you some numbers in Canada. I don’t actually know if
there is an exchange in Italy, but there are 100 globally so my
guess is there probably is one.
6:30
Banking, Trade and Commerce
[Translation]
27-3-2014
Senator Hervieux-Payette: I am starting to understand the
purpose and especially the fact that both money launderers and
people who do not want to pay income tax or sales tax can
benefit. I am trying to see other benefits.
Senator Bellemare: Thank you. It is very interesting to learn all
this. How does bitcoin work? It requires machines, computers,
that sometimes break. So people are needed to fix them. There is a
workforce and there are people in the background who make
money from this.
Banks charge interest and collect service fees to cover their
costs and make a lot of money. Who earns income from this
initiative, and how are these services paid for? Is it just fees? Are
there people who make money from bitcoin? Do the profits come
from the volatility? Are profits generated, who receives them and
how are the costs paid for?
[English]
Mr. Murchison: I don’t actually know the full answer to that
question.
Clearly, we talked about the verification of the transaction.
Those people involved in verifying the transaction through the use
of computing power have compensation in the form of a bitcoin,
or fractions of a bitcoin that are paid back to them during that
process, so they are compensated at that time. Otherwise, the
compensation is in the form of the commodity and whether that
appreciates. If I was smart enough to have taken a bitcoin from a
vending machine a year ago and held on to it, I would be a much
wealthier man today than I am. I didn’t do that, actually.
Equally, there will be people who have lost money in that
commodity trade.
The network wasn’t envisaged as a business that was to
generate profit. I think that would be the point that I would
make. It was generated by someone who was interested in math
and in the ability to make it and not in its potential as a business.
Senator Massicotte: Like the Internet.
Mr. Murchison: That is exactly right.
M. Murchison : Exactement.
[Translation]
Senator Bellemare: Money is made from the user fees, and
profit can potentially be earned from the fluctuations in the value
of bitcoin. Is that right?
[English]
Mr. Murchison: I should clarify. So we have the network, what
we have been calling capital B Bitcoin. But much like the Internet
in the early days, if you will recall, there is this protocol language.
It wasn’t until, in my case, Google came around and allowed me
to have an interface that allowed me to access that in a reasonable
27-3-2014
6:31
way that it became useful for me. In the same way, we have a
variety of businesses that are popping up to give you that
interface and the exchanges of providing that interface as well;
they are all in business to make money. So they are charging.
When I choose to take my bitcoin and convert it into Canadian
dollars, I am being charged a transaction fee for that. I think we
suggested it ranges between half a per cent to 1.5 per cent.
Those people are in the business to make money. The network
itself was much like the Internet, as one of the senators said. It is a
network.
Senator Massicotte: Being conscious that we are being televised
— am I correct in saying that?
The Chair: That is correct.
Senator Massicotte: I must explain to the public that we must
appear naive and ignorant but I want to tell the public that we
know all the answers to the questions. We are just trying to make
sure our witnesses know.
Mr. Murchison: Thank you very much.
Senator Massicotte: I will go back to the basic question that
Senator Tkachuk and Senator Greene asked — we were all trying
to get it — how is this created? We have $8.4 billion in circulation.
It is simplistic. It seems to me at the very beginning someone says
I will create this money. I will put in $100 or $100,000 and then
create this. Someone has to be a sponsor because eventually those
bitcoins will be converted to merchandise and the fellow selling
that merchandise wants cash. Am I correct in saying if there is
$8.4 billion out there, collectively they spent $8.4 billion? Forget
the currency speculation and conversion; there is that kind of
money sponsoring that system. Is that correct? Is it a bit like the
central bank would do? There are seigniorial rights; money is
sitting there some place. Is that right?
Mr. Murchison: I think the numbers on daily transaction
values would suggest about $375 million is being transacted every
day.
Senator Massicotte: But what is the amount of bitcoin sitting
out there today?
Mr. Murchison: We have an outstanding number of bitcoins of
— how much is it?
Mr. Karp: It is around $7.3 billion now.
M. Murchison : Il y en a pour — combien encore?
M. Karp : Environ 7,3 milliards de dollars.
Mr. Murchison: It is $7.3 billion and today the market value is
$700 and some odd dollars.
Senator Massicotte: If you forget the appreciation value, the
speculation aspect, is it correct to say there is $7 billion of
currency of some country that was put in the system to support
that?
6:32
Banking, Trade and Commerce
27-3-2014
Mr. Karp: No, because I think the value that bitcoin gets is
from what people are willing to pay for it. At the current price
that people are willing to pay for one bitcoin, if you multiply that
by the number of bitcoins in circulation, you would get
$7.3 billion. But that could potentially change tomorrow.
Senator Massicotte: Forget the fluctuation. When you first
started off, I went to some bank or to some place and put cash in.
I know there’s fluctuation. It looks like they went up in value a
lot. If you presume it went up by 100 per cent they take half the
amount, but that means someone put up a lot of cash, no?
Mr. Karp: The value wasn’t always as high as it is now; it used
to be a fraction of the dollar. The initial bitcoins were created by
mining. People didn’t necessarily put money in. They would have
verified transactions using their computer, and then they would
have sold those bitcoins to other people. That is where the cash
first comes into the system.
Senator Massicotte: Is there the same risk like the bank when
there is a run? Let us say we all say we want to cash in our
bitcoins. Someone has to pay these merchants if you all spend that
money, no? And you can’t run out.
Mr. Murchison: The way I think about it — and, David,
correct me if I am wrong — it is much like an initial public offer,
IPO. If you are a company and you come to the market with an
IPO, I might offer my shares out for $10 and I have 100 shares.
That is $1,000 that I get into my company, less any fees. Those
same shares can then trade in the secondary market.
Senator Massicotte: But I’m trying to avoid the depreciation. I
know it went up and down, but besides that?
Mr. Murchison: Those could go up to $100 but the company
only ever saw $1,000.
Senator Massicotte: It appreciates, but other than appreciation,
the fundamentals — that is, the gas, or the liquid, or the energy —
cash went in, no? Otherwise, how do the merchants get paid?
Senator Ringuette: No, no.
Senator Tkachuk: If you went to the bank, and everyone asked
for their money, the bank could go broke.
Senator Massicotte: Agreed, but that is why central banks are
there. That means there is a guarantor.
Senator Tkachuk: Let us see what would happen if everybody
did it and see how long the central bank would last.
Senator Massicotte: Our central bank makes over $1 billion a
year because someone put in cash for that currency. I am saying
that somebody put in cash for this currency also — maybe not the
same amount.
Senator Ringuette: No. It is an artificial value.
27-3-2014
The Chair: What is the question you want to ask here?
Senator Massicotte: I am trying to understand, chair. If I
understand well enough, I will do it again and again and again,
before all you guys do!
Senator Tkachuk: The bank prints it.
6:33
Mr. Karp: Bitcoins come into creation when they are mined.
You verify a transaction; you are awarded with 25 bitcoins. You
are not putting money into that directly. You have to buy your
computer, the computing power and the electricity, but you are
not putting money into those bitcoins.
Senator Massicotte: But that money only comes to that party
that did the transaction. Not everyone is on the network, right? It
is just like a rebidding requisition on your purchase price, no? Is it
a percentage of your purchase price? If you spend 100 bitcoins
you get how much back? If you spend 200 you get twice as much
back?
Mr. Karp: No. You only earn bitcoin for free if you are able to
successfully verify transactions.
Senator Massicotte: It is based on transactions.
Mr. Karp: It is not based on the value of those transactions or
anything; it is a flat rate.
Senator Massicotte: So every transaction you get a certain
amount of bitcoins back?
Mr. Karp: Correct, yes.
M. Karp : C’est exact.
Senator Massicotte: It must be an insignificant amount;
otherwise, it would make the whole thing inefficient if it is too
large relative to the transaction.
Mr. Karp: That is how all new bitcoins are generated. That is
why the number is increasing and will eventually hit $21 million.
Senator Massicotte: You are saying that the $8.4 billion is just
electronic stuff in mid-air? That is, there is no cash supporting any
of that?
Mr. Murchison: Yes.
M. Murchison : Oui.
Mr. Karp: Yes.
M. Karp : Oui.
Senator Massicotte: I would get out of there pretty fast.
The Chair: You’ve got it!
Senator Greene: I have one technical question and one
probably stupid question.
If there is a 21-million cap in bitcoins, and we have about 14
million or 15 million in circulation now, what happens when we
reach the cap, and when are we likely to reach it?
Mr. Karp: To answer your first question, when you reach the
cap, instead of having new bitcoins being given to you as an
incentive for verifying transactions, users would specify a
transaction fee. They would say, ‘‘If you verify my transaction,
6:34
Banking, Trade and Commerce
I will give you this small fraction of a bitcoin.’’ I am not sure of
the exact date that the cap is expected to be reached, but I think it
is in about 10 years or so.
Mr. Murchison: I think I have seen 2030 as one date.
27-3-2014
Senator Greene: Second, I am reluctant to ask this, actually,
because on one level, to me, it sounds a little ridiculous, but we all
know that inflation is part of the currency system we have now.
Some governments inflate their currencies for a reason and they
do it on purpose; others at other times try to get rid of it and keep
it as low as possible, et cetera.
Is there any inflation, as we know it — as we can define it — in
relation to traditional currency? Is there any inflation in the
bitcoin? If there isn’t — and I tend to think there isn’t — then isn’t
that another advantage of a bitcoin?
Mr. Murchison: Yes.
M. Murchison : Oui.
Senator Greene: Okay. Thank you.
[Translation]
Senator Maltais: You repeated several times that the people
who created the bitcoin network were minors. I am wondering if I
understood you correctly, because Newsweek does not agree with
you. It claims that it was someone named Satoshi. This month, in
March 2014, it published a long article revealing that the creator
of these precious coins is apparently a 64-year-old naturalized
American of Japanese origin named Nakamoto. Do we really
know who created bitcoin? Who is right here?
[English]
Mr. Karp: That is a good question. The paper that created
bitcoin, and it is actually on our last slide, slide 28 — it was by an
individual or a group of people with the pseudonym Satoshi
Nakamoto. I am familiar with the Newsweek article, and it has
been disputed somewhat. I want to clarify that.
Miners don’t create bitcoin. It is a network. It’s a protocol, and
that was created by an individual or a group of individuals calling
themselves Satoshi Nakamoto. Miners verify the transactions,
and in exchange for verifying the transactions, they earn new
bitcoins, so as new bitcoins, new individual units of the currency
are created.
[Translation]
Senator Maltais: Is there a way to find out how many bitcoins
are in circulation? Who prints them? Who controls their
circulation?
27-3-2014
[English]
Mr. Karp: That number is publicly available. You can find it
on the Internet. I’m not sure what the exact number is, but we can
get that for you.
[Translation]
Senator Maltais: Who can print them in large quantities? Who
controls that? You say they are worth $7 billion, but if I ask
someone else, I might hear that they are worth $21 billion. No one
controls that.
[English]
Mr. Karp: I guess the best way to explain it is that there is a
protocol, an initial set of rules designed by Satoshi Nakamoto to
govern how this system works. Everyone knows the rules, and the
system is governed by these rules. If people want to change the
rules, there is a democratic structure through which they can be
changed by all bitcoin users.
[Translation]
Senator Maltais: The American tax authorities have looked at
this issue a little bit. Fifteen days ago, the American financial
market regulator, FINRA, which you know, stated that bitcoin is
one of the riskiest investments out there and that it facilitates
fraud and scams. Is this true?
[English]
6:35
Mr. Murchison: I think it has a lot of risk attached to it, yes.
The Chair: I will conclude with a question from round one
because we have a number of questions on round two.
Mr. Murchison: Oh, good.
M. Murchison : Excellent.
The Chair: I started by asking if you thought this might be a
fad, to which you responded quite clearly. I am interested in this
whole concept of converting from real currency to virtual
currency, virtual back to real currency because, certainly, in
money laundering, terrorist financing, et cetera, you can’t pay in
bitcoins. You need hard, cold currency to pay salaries, whatever it
may be.
At the other extreme of its being a fad, can you imagine a
world where virtual currencies actually achieve large-scale
adoption and you are not into the conversion situation?
Looking way out in your crystal ball, is that a potential issue?
Mr. Murchison: As I tried to conclude on the last page — and
this is really just summarizing other analysts and commentary I
have read — I think that would be appear to be unlikely at this
time.
6:36
Banking, Trade and Commerce
27-3-2014
I would point to, in the references that we have left at the back
of that deck, a comprehensive piece by Goldman Sachs which
covers a wide swath of views on this. I think you will have a good
sense, if you read that, of what the prevailing views are of both
those advocating and those who think it’s a silly thing.
The Chair: Thank you. That concludes round one, so we will
now commence with round two.
I am sorry; I have a question in round one.
[Translation]
Senator Rivard: We find ourselves in the era of virtual
currency, but there have been earlier attempts to create
common currencies. We know that, well after the creation of
the European Community, the euro was established. In or about
the 1970s or 1980s, a number of European countries wanted to
have a common currency they called the ECU. Does that sound
familiar? It disappeared after a few attempts to establish it.
I remember, for example, that in some European countries like
France, to get us used to the idea, menus listed the price in French
francs, at the time, and the equivalent in ECUs. The Europeans
were very hopeful that this would become the currency of all
European countries and eventually of the entire world. But it
failed.
Now we are talking about a virtual currency, bitcoin, that
might have a future. Of course, we are in another century and
things are different, but the ECU did not last; it was never a
common currency, but people tried to implement it. Are the two
comparable?
Now, in the digital age, it is much easier, printing-wise, to
exchange currencies than in the 1970s. Printing ECUs and then
starting to distribute them to every country would have been
much more complicated then.
This is more of a comment than a question, but do you
remember when the Europeans tried to make the ECU their
common currency?
[English]
Mr. Murchison: I don’t, senator.
[Translation]
Senator Rivard: You are too young.
Mr. Murchison: Yes, perhaps.
[English]
I don’t remember the ECU, the European Currency Unit. Was
it the 1970s?
[Translation]
Senator Rivard: Senator Hervieux-Payette remembers that
time, I think.
27-3-2014
Senator Hervieux-Payette: The euro replaced the ECU.
Senator Rivard: Exactly.
Senator Hervieux-Payette: Only the name gained some
traction.
[English]
The Chair: Thank you. That now concludes round one, and we
will move to round two.
[Translation]
6:37
Senator Bellemare: I would like to return to the issue of the
convertibility of bitcoin into money. If I understood correctly, if
you want bitcoins, you have to buy them. They do not just fall out
of the sky.
You have to go to a machine to open a bitcoin account, and it
is a virtual currency that you cannot see. The machine does not
give you any currency, but you have to put in Canadian currency
or withdraw some from your bank account.
In the era of the first kind of fiat money, which was put into
circulation and was convertible into gold, people would deposit
gold and receive currency from the various banks. The banks
printed more than the value of the gold in order to lend and make
money. When large withdrawals were made and the banks did not
have enough gold, they collapsed.
With bitcoins, to ensure they can be converted, they need to be
backed by something, since an automaker will not sell a Tesla to
someone who wants to pay in bitcoin, given that Tesla does not
necessarily pay its employees in bitcoin. Those who are paid in
bitcoins cannot buy milk and bread with them, as bitcoin is not in
widespread use, so they need monetary backing in a currency that
people trust.
That does not mean there is $12 billion in cash somewhere, but
there has to be a way to convert bitcoins. So there is money
somewhere. Could you expand on this a little?
[English]
[Traduction]
Mr. Murchison: The vision of bitcoin presumably as a currency
would be to replace what we know as dollars today. That would
be the reach objective.
I would concur with you. I think your point is whether that
seems unlikely for the reasons that you’ve put forward. I would
agree with you, yes. I don’t think it will hold a value of exchange
and be widely accepted enough to provide the service of what we
commonly think of as a currency.
6:38
Banking, Trade and Commerce
[Translation]
Senator Bellemare: Could you describe what happened when
you used this machine to complete the transaction?
[English]
Mr. Murchison: That would be you.
Mr. Karp: You’re talking about a bitcoin ATM specifically?
Senator Bellemare: Yes.
27-3-2014
Mr. Karp: You go to the machine and you type in how much
bitcoin you want to buy in Canadian dollars, and then it takes
money into a slot like a vending machine, the exact amount. It
then sends the money to your cellphone. You can get an
application for your cellphone, which is actually what’s on
slide 26. That’s a screen shot from a bitcoin application.
In the top right corner is what is called the QR code. The
machine will scan the QR code on your cellphone so it knows
which address to send the bitcoins to, and then it will send the
bitcoins to that address.
[Translation]
Senator Bellemare: And the machine takes your money?
Mr. Karp: Yes, exactly.
M. Karp : Oui, exactement.
Senator Massicotte: And where does the money go?
[English]
Let’s continue with that. I would actually ask the same
question that I asked on the first round, but I’ll make as if I
understood and go to the second question.
Let’s follow the money. The machine has this money. What
does it do with it?
Mr. Karp: It’s revenue for the company that owns the machine.
Senator Massicotte: Okay. How do I buy that machine? I like
that idea. How do I get that machine?
Mr. Karp: There are two or three companies that manufacture
bitcoin ATMs that you could buy from them.
Senator Massicotte: What I don’t understand is, I’ve got a
machine, I’ll put it in a shopping centre someplace, I collect the
cash and I can keep the cash?
Mr. Karp: Yes. You would still have to buy the bitcoin from
someone. You have to supply the bitcoin.
Senator Massicotte: So I’ve got to take the cash I got from you
and pay it to somebody?
27-3-2014
6:39
Mr. Karp: Now you’re getting to an area that’s a bit beyond
my expertise. I believe some of the machines partner with the
bitcoin exchange.
The machine owner, on the back end they’re working with a
particular exchange that has bitcoin or has people coming to the
exchange that are willing to sell their bitcoin, and then the ATM
will collect the cash. Some of that cash will go to the exchange to
pay for the bitcoin, and then the ATM owner would keep a cut as
a transaction fee. That’s my understanding of it.
Senator Massicotte: Let’s go to the exchange. Where does the
cash go? What does it exchange to?
Mr. Karp: There are two models of bitcoin exchanges. One
operates like a stock exchange, so you have buyers and sellers that
come with fiat currency and virtual currency and they post bid
and ask prices.
Senator Massicotte: Where is the cash, though? Now the cash is
down to the exchange, let’s follow the cash. Where does that cash
go?
Mr. Karp: Into the bank account of the exchange, presumably.
Senator Massicotte: Therefore, with the exception of what I call
rebates, that percentage when you do a transaction. With the
exception of inflation, it’s like currency. When countries issue too
much currency there is inflation and it goes up and down. With
the exception of that, there is largely cash supporting a large
percentage of the amount of bitcoin supposedly out there. I guess
that relates back to my first question. It seems to me there must be
cash someplace, a very large amount of it.
Mr. Murchison: Certainly there’s cash in the system. However,
it’s not the case that you only get to have bitcoins by putting cash
into the system, which I think is the question —
Senator Massicotte: But there’s a percentage of rebate.
Mr. Murchison: There’s a minor —
Senator Massicotte: It has to be extremely minor, because if it’s
significant then the system is inefficient, totally contrary to the
objectives of the founders. That’s like a commission cost. It’s an
inefficiency of a payment system. It has to be very minor. A very
large portion must be cash.
Mr. Karp: If you’re not mining bitcoin, if you’re exchanging it,
certainly you’re exchanging it presumably for cash or for goods
and services. There is a lot of cash behind it, absolutely.
Senator Massicotte: Can I go to my real question? That was a
supplementary question.
The Chair: We’ll let you ask the real question.
6:40
Banking, Trade and Commerce
27-3-2014
Mr. Murchison: We do know that daily transactions are in the
order of $375 million to $400 million per day. Those are going to
be largely cash transactions, or cash will be a major component of
those transactions. That’s a reasonable amount of money.
Senator Massicotte: You said in your report that you’ve got
how many billions? What is that number? Was it $8.4 billion?
There are two concepts here. How is it created? As you’ve
probably noticed, I’m having trouble understanding that.
One of the major motivations of this currency is not only the
efficiency but the anonymous nature of it, if you look at Silk
Road and all of that. You said in your presentation that it’s
pseudo-anonymous but it was not very anonymous.
Mr. Murchison: That’s correct.
Senator Massicotte: What is the fact? If it isn’t very
anonymous, how do all the drug dealers and so on get away it
with it? You say every time you do a transaction there’s a ledger.
That means on my iPad, given it’s not centralized, every computer
has it. But that ledger only says ‘‘transaction’’ and with some
code, maybe 15 digits, identifying the person. But you said they
can use that information to find out who the person behind that
is. Then I am lost. Is it anonymous or is it not?
Mr. Murchison: My own view is that it is not very anonymous.
Senator Massicotte: So all those drug dealers made that
mistake?
Mr. Murchison: I think actually we had some estimates of what
the illicit activity would be on bitcoin today. It’s a relatively small
number as a fraction of the total value, actually.
Senator Massicotte: It’s erroneous to think that it is
anonymous. People are making that mistake.
Mr. Murchison: I think that’s right, in much the same way as
when the Internet came in and there were lots of concerns about
email being untraceable. We have since discovered that those
things all leave a pretty good trail.
Senator Massicotte: The IRS declared yesterday that they will
treat it like property. When you buy bitcoins and convert them to
merchandise, any depreciation or appreciation of that asset would
be a taxable transaction. You have to pay sales tax and so on. The
amount of accounting is immense, not like with a currency. Will
that not kill the whole thing?
Mr. Murchison: No idea. I would imagine it will put a damper
on it.
Senator Greene: I’m interested in your answer to a question
that Senator Bellemare posed. It seemed to me that you were not
completely convinced that it would make a good medium of
exchange to purchase goods. It would not be a currency in that
sense. Yet, in the past couple of weeks I’ve read articles that
27-3-2014
6:41
indicate some restaurants in New York accept bitcoin. Do you
think that’s a temporary thing? The more it’s used, the more it will
be used.
Mr. Murchison: Well, I suspect that subject to IRS treatment,
perhaps, and some regulatory actions being taken, I think we’ll
see more of that, not less. The question I thought I was answering
was, did we imagine that this would replace the Canadian dollar
at some point? I suppose it could. Commentators that I’ve read
seem to think it’s unlikely, but it could develop into that, maybe.
Senator Greene: Okay.
Mr. Murchison: One thing that people point to as a strong
advantage is the decentralized nature of the virtual currency. I
point to the fact that as we think about currency, we recognize the
important tool that governments have in controlling our
economy. We do that in part through the control of our money
supply; and we do certain things to it fiscally and monetarily.
That’s an important lever that governments would be concerned
about losing in this world.
Senator Greene: This is probably a naive question, but in terms
of the discussion about the future of bitcoin and whether it could
replace a national currency, do you see it in some ways as a more
efficient transaction method than the currencies we have around
the world?
Mr. Murchison: I wouldn’t think of it on the currency side as
much as a payment system. It has some interesting potential as a
payment system. It has the prospect of being cheaper than the
way many of us pay for goods today through Visa and
Mastercard transactions, including bank transfer fees. It has
that possibility, which is interesting and innovative.
At the end of all those transactions, there is a conversion to a
currency and a transaction cost attached to it. That’s exactly
right.
Senator Bellemare: I want to conclude on the convertibility of
the system.
[Translation]
There are 100 exchanges worldwide, and when you put money
into the machine, you are opening an account, and so forth.
Regarding convertibility, can the rate vary from one exchange
to another? Does it depend on what is in the machine? So, when
you insert money, you are opening an account, and if someone
else wants to convert bitcoins into dollars, it depends on the
number of people who have purchased bitcoins and those who
want to exchange them. Is that how it works?
[English]
Mr. Murchison: It’s a marketplace, and currency values go up
and down.
6:42
Banking, Trade and Commerce
[Translation]
27-3-2014
Senator Bellemare: There are 10 exchanges in Canada?
Mr. Murchison: Yes, 10 exchanges.
M. Murchison : Dix bourses, oui.
Senator Bellemare: So the exchange rate can be different at
each exchange?
[English]
Mr. Murchison: Yes.
[Translation]
Senator Bellemare: I understand how it works.
[English]
Mr. Murchison: It works in the same way as a currency
exchange on the corner here or at the airport. The rate fluctuates
minute by minute on world markets; and it depends of course on
the transaction side.
[Translation]
Senator Maltais: If I wanted to pay my taxes in bitcoin, as
Senator Bellemare just said, and to do that I went from my
exchange to yours, at the Department of Finance, and there was a
difference of X dollars, would you send me a bill for the
difference? Yet, I acted in good faith and paid you in valid money.
It is not the customer’s fault if the exchange lost value in the
meantime. What happens in such a case?
[English]
Mr. Murchison: At this point, we wouldn’t take your bitcoins
to pay your taxes.
[Translation]
Senator Maltais: Why? You do not trust me?
[English]
Mr. Murchison: The government has a fiat currency, which
today is the Canadian dollar. One of the underpinnings to that, as
I understand, is the payment of taxes in that currency.
The Chair: I will take the liberty as chair to direct a question to
Ms. Grasham, whom we have not heard from. What question do
you think we should have asked that we did not ask? That will be
the concluding comment of the day.
Rachel Grasham, Chief, Financial Crimes - Domestic, Financial
Sector Division, Department of Finance Canada: Just from
listening to the discussion about the convertibility and so forth,
it would be interesting to ask Canadian merchants who accept
27-3-2014
6:43
bitcoin: To what extent are they treating it as a currency? When
they receive the bitcoin, do they pay their suppliers in bitcoin, or
are they immediately turning it around and converting it to
Canadian dollars and treating it like a gimmick?
At the beginning of this about a year and a half ago, the news
stories were all about merchants now accepting bitcoin. It seemed
like a gimmick to get some media attention and advertise their
businesses. I’d be interested to know what percentage of those
merchants are buying into it as a currency versus just accepting it
and trying to avoid the volatility of risk by immediately cashing
out.
Senator Tkachuk: And the answer is?
Ms. Grasham: That would be my question.
Senator Massicotte: That is a complicated subject, but it is not
complicated compared to what Senator Greene said. I am having
trouble understanding what he said: ‘‘The more it’s used, the more
it will be used.’’ That’s a heavy statement, and I’m trying to
understand it clearly. But it’s true.
The Chair: This is the just the outset of our study. I suspect we
have a long way to go.
To our panel today, I would like to express the great
appreciation of every member of the committee. It is one of the
most stimulating discussions we’ve had before this committee. In
all my days on a committee, I have never heard more senators
start by stating, ‘‘This may be a very naive question but . . . ‘‘
I think that’s an indication of the great interest you have
stimulated. To each of you, we appreciate your presentations
today and the work you have put in. Thank you very much.
This meeting is adjourned.
(The committee adjourned.)
OTTAWA, Thursday, March 27, 2014
OTTAWA, le jeudi 27 mars 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. Today, the committee is holding its
second meeting as part of its study on the use of digital currency.
As part of this first stage of hearings, the committee is exploring
the concept of currency and digital currency generally.
Yesterday, we received a presentation from senior officials at
the Department of Finance. During the first hour of today’s
meeting, we will be hearing from economic historian Dr. Warren
Weber via video conference, I believe from Minneapolis, sir.
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Banking, Trade and Commerce
Warren E. Weber, Economist, as an individual: I’m in Atlanta.
The Chair: Still south of the border.
27-3-2014
Dr. Weber has held several positions in public service and
academia, including most recently as Senior Research Officer with
the Federal Reserve Bank of Minneapolis. Dr. Weber has written
extensively on the use of private currencies during the free
banking period in the United States and the creation of
government-issued currency and was recommended to us as a
witness by the Bank of Canada based on past working
relationships.
Dr. Weber, thank you very much for accepting the invitation
to appear before us.
The floor is yours, sir.
Mr. Weber: I very much appreciate this opportunity to give a
presentation to you. This is a topic that’s near and dear to me.
I’ve been working on it for the past 30 years.
If you will turn to page 2 of the presentation, I think there’s a
great deal that can be learned from the past, even though the
institutions and technologies have changed a great deal since then.
The case that I am going to talk about today is the case of state
banknotes, and these were used as the predominant media of
exchange in the United States prior to 1860.
A little bit of institutional detail that’s not in the notes is that
the banks, during this period, were state-regulated. There was no
federal regulation of banks. There was no central bank in the
United States at that time, and branching was very limited. Only a
few states permitted any bank branching. If bank branching was
permitted, it was limited to the state in which the bank was going
to exist, and that meant virtually most of the banks in the United
States at this time were single brick-and-mortar institutions.
Each of these banks issued something called a ‘‘banknote,’’
which looks very much like the currency we have today, but these
banknotes had many of the characteristics of privately issued emoney that we think about today.
If you will now turn to page 3, the similarities are that these are
bearer instruments, just like currency is today and just as when we
talk about e-money, people think it will be a bearer instrument.
They were denominated in dollars, and they were liabilities of the
issuer. These state banknotes were redeemable in specie — that’s
monetary history jargon for gold and silver coins. They were
redeemable in specie on demand. Each bank was issuing its own
notes. These notes were very distinct. You were easily able to
recognize what bank issued it. It stated very clearly on them that
they were redeemable in dollars on demand.
The differences between these and what people think of as emoney today are that these could be issued for credit. You could
go into the bank and ask for a loan, and the bank would give you
state banknotes in exchange for the piece of paper you signed.
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6:45
Unlike e-money, no accounts were required at the issuer or the
receiver of the e-money. None of those accounts were required for
this exchange to occur. In other words, no record-keeping was
necessary with these state banknotes, whereas such recordkeeping is going to be required with any e-money that comes
into existence.
If we now turn to page 4, I’ll give you some idea of how many
of these state banknotes there were. There was a large number of
banks, and each of these banks issued their own distinct notes.
There were 320 banks in 1830; there were 602 banks in 1845; and
the number of banks in 1860 had risen to 1,400.
Think about it. We have a country of the United States in
which there could be as many as 1,400 different currencies
circulating at the time. I think there is good evidence that they
were widely used as media of exchange. One piece of evidence is
I’ve done an extensive study of the balance sheets of the banks
during this period, and for virtually every one of them there’s an
item listed of ‘‘notes of other banks’’; so in their normal course of
business, banks have been accepting the notes of other banks,
probably to pay off loans.
There’s other evidence that they circulated outside the local
area. I actually have a couple of notes I’ve collected, and I can see
stamps on them that indicate they have been used outside of the
local area. There were publications during that period called Bank
Note Reporters and Counterfeit Detectors. They were published by
brokers in various cities, and these publications listed every bank
that was in existence at the time and the rate of exchange of the
notes of that bank for notes of banks in the local area.
I think there’s good evidence that these were widely used. They
were the predominant media of exchange. Most of the gold and
silver coin in existence during that period was in the vaults of
banks to be used to redeem notes if they were presented for
redemption.
This banknote system had several significant problems:
counterfeiting, losses to note holders, which I have called
default, and nonpar exchange. I put that in red because I think
that may be the issue that people would see as most problematic.
But as I mentioned, by 1860, there were 1,400 of these banks.
Basically you had a system in which there were 1,400 exchange
rates, which were floating. They were not fixed. What I mean by
‘‘non-par exchange’’ is that a dollar in one location didn’t
necessarily exchange for a dollar in a different location during
that period.
Turning to page 6, I would like to go through these problems
one at a time very briefly.
As you probably guessed, when I said there were publications
out there called Bank Note Reporters and Counterfeit Detectors,
counterfeiting of state banknotes was widespread. In these
privately issued Bank Note Reporters and Counterfeit Detectors,
on the first page of them would be a list of the new counterfeits
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Banking, Trade and Commerce
27-3-2014
that they had discovered since the last publication. These
publications were coming out in some cases weekly but in most
cases monthly.
As you got later into these listings of the banks that were in
existence in one of these publications, underneath each bank they
listed all the known counterfeits of the banks at that time, and
you could almost tell how long a bank had been in existence by
how long that list of counterfeits happened to be.
In terms of today and e-monies, I would expect that some type
of information system about counterfeits would arise. I am
thinking a little bit in the past where if you went into a store and
handed in your credit card, they might have hauled out a
publication that listed all the stolen credit cards or the possibly
fraudulent credit cards. I expect some type of information system
like that about possible counterfeits of e-money would arise.
I would also expect, though, that with point-of-sale terminals
they could deal with the counterfeiting problem much better
today. I think it might be an issue with e-money, but I don’t think
it’s going to be a big one. In any case, I think it’s going to be an
issue for legislation in terms of enacting penalties for
counterfeiting or hacking, how many funds are allocated to
enforcement, things like that. I don’t think this is really a problem
that’s best addressed by bank regulators.
Turning to default on page 7, there were defaults and losses to
note holders with the state banknotes, but I think this is going to
be a problem with any privately issued fractional reserve money. I
expect that e-monies, if issued, are going to be fractional reserve
instruments.
Safety was a very serious problem. As I said, I have done
extensive research, and I have come up with 2,384 banks that were
in existence at some time during this period, and up to 407 of
those, or 17 per cent, failed with possible losses to note holders.
Another way of seeing the seriousness of the problem is that if
a bank closed during this period there was about a 50 per cent
chance that the note holders of that bank were going to suffer
some loss as a result of that bank closing. Some of these losses got
as high as 90 cents on the dollar. Most of them were less than
50 cents, but still those are pretty significant losses to take.
What are some of the possibilities that this experience suggests
for regulating e-monies? If we turn to page 8, one possible
regulatory solution for default would be to require 100 per cent
good asset backing. Some states actually did try this. Some states
required their notes to be 100 per cent backed by state bonds.
These were the so-called ‘‘free banks’’ that were referred to in the
introduction.
27-3-2014
6:47
Not all of the banks during this period were free banks. In fact,
most of them were not. The idea of free and free banking has
nothing to do with laissez-faire. It really refers to the fact that
some states passed laws that permitted free entry into banking. If
a state did not have that kind of law, if you wanted to start a bank
you had to get a special charter from the state legislature to set up
your bank.
There were about five or six states that actually had extensive
free banking systems, systems that required the notes to be
100 per cent backed by state bonds. One of these states, New
York, actually had pretty safe notes, but most of the others did
not. The problem was that the state bonds were subject to price
fluctuations, and other than specie, there were really no safe assets
to back these notes.
If you were considering requiring 100 per cent backing of emonies today, it seems to me that what’s going to happen is the
result is going to be issuers charging transaction fees to the people
who use them to make up for the lost revenue that they could get
from issuing these if they didn’t have to back them 100 per cent.
The other regulatory possibility, which I’m sure you’ve thought
of, is that you would offer government insurance of e-monies.
Actually, there are some interesting episodes in this earlier period.
Some states actually did offer banknote protection. Nominally the
protection was 100 per cent of notes, but it didn’t work out to be
that way. The reason that it didn’t was really in the laws
themselves, and I don’t have time to get into that in these opening
remarks.
What I see the problem would be today is that it could
exacerbate the too-big-to-fail problem with our financial
institutions, that if a financial institution is issuing e-money,
and it was government guaranteed, the e-money issuer could
become more systematically important, and I think that would be
a problem.
Let me turn now to page 9 and talk about non-par circulation.
What I mean by ‘‘par circulation’’ is what I said earlier: a bank in
one location would exchange a dollar with a bank in a different
location. Non-par circulation means that doesn’t occur.
It’s slightly different from the issue of fixed versus floating
exchange rates. Par circulation is fixed exchange rates at one-toone. Just as an aside, I’ve added this bullet on page 9 about the
problem of non-par circulation which can occur between any two
monies or even denominations of the same money.
We are accustomed to saying, ‘‘I can take a five-dollar bill and
get it exchanged for five loonies, but you need some kind of
mechanism to guarantee that that is the case.
Today we all have mechanisms, dealing with the Bank of
Canada or your treasury stands willing to make those exchanges
any time someone wants to, but if there was no entity standing
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Banking, Trade and Commerce
27-3-2014
there willing to do that, there’s no reason why such an exchange
should occur. In one case, they were pieces of paper with fives on
them; in another case, just coins that happened to have a one on
them.
With the state bank notes, if we turn to page 10, if we look at
the data back then, in general the notes of different state banks
circulated at discounts to each other and these discounts were
time-varying.
To get around this, two solutions were tried during the period.
The first solution was to set up a par clearing system, and there’s a
great example, one that I’m very fond of. It’s called the Suffolk
Banking System, and it was established in New York between
1825 and 1858. A bank in Boston called the Suffolk Bank
established what I would call reserve accounts like the reserve
accounts at the Bank of Canada or the Federal Reserve Bank.
They established reserve accounts for each bank that was willing
to join this system, and then they net-cleared member banknotes
at par. So if you were a member of that system and you brought
in the notes of some other bank that was a member, it would
credit your reserve account with that number of dollars. If
somebody brought in your notes, they would debit your account
for the number of dollars that you brought in. Basically, all New
England banks joined.
The result of this system is that the notes of all banks in New
England circulated against each other at par. This did not happen
anywhere else in the country.
I think there are two regulatory lessons that come out of this,
or two e-money lessons that come out. One is that such a
mechanism could be private. You don’t necessarily need the
government to set up this kind of par clearing system, and the
system could arise endogenously; in other words, the government
does not have to set it up.
Turning to page 11, there was a second solution, which I have
labelled ‘‘Required Acceptance.’’ I’ve given you the names of two
cases: the State Bank of Indiana and the State Bank of Ohio. They
required their branches to accept each other’s notes at par. These
are kind of funny systems. They were called state banks and they
were said to have branches, but really these branches were
independent banks. They just decided to join something called the
State Bank of Indiana system, but if you were a bank or wanted
to be a bank in Indiana or Ohio and you wanted to be part of this
system, you had to agree to accept the notes of any other bank
that was part of the system. You had to accept them at par.
The reason I put ‘‘accept’’ in red is that all you had to do was
take them as payment for paying off a loan or something like that.
You did not have to redeem them. You didn’t have to give out
specie for another bank’s notes, but you did have to accept them.
The result is that the notes of all of the branches of Indiana and
all of the branches of the State Bank of Ohio circulated at par
against each other.
27-3-2014
6:49
What do I take from these two experiences? I take that
required acceptance can achieve par exchange. However, to get it,
it’s going to require some form of regulation. It’s just not going to
occur on its own.
Turning to page 12, what does this experience suggest about
how to achieve par exchange? I think it suggests that a private par
clearing entity could do it. There are a couple of problems. The
first is that profits of the clearer may cause antagonism. The
Suffolk Bank did have basically higher profit rates than any other
bank in Boston or in New England at the time and that made a
very large number of banks in that area unhappy about it. They
were still members of the system because of the benefits, but they
would have preferred that Suffolk had to distribute some of those
extra profits to them.
The other problem is that they may not arise during this
period. It only occurred in New England. It did not occur in New
York or Philadelphia. It occurred nowhere else in the country and
the question is why? So it may not occur.
Required acceptance could do it, but I see a couple of problems
with required acceptance. One is that the e-dollars might pile up
at certain issuers or certain locations. It’s not clear that things are
going to be balanced in terms of where these e-monies circulate,
so if you’re required to take someone else’s e-money you might
end up with a whole bunch of their e-money, and the problem is,
how do you get rid of it?
I should note — and I have it in parentheses — this is not just a
problem for e-money; it’s a problem for Bank of Canada notes,
for Federal Reserve notes. It’s a problem with any currency
system.
The third way you could achieve par exchange would be to set
up a government clearing house. It would do it. I think there are
questions here that have to be answered, which are, who is going
to pay for it and how are you going to assess the fees necessary to
set it up and keep it running?
My conclusion, on page 13, is that if I look at the state
banknote system and I think about it in terms of e-money, what
does it suggest? Can a privately issued e-money system operate
efficiently? I think the answer from the experience of this period is
that yes, it can, but it’s going to require appropriate regulation
and supervision. I think to minimize counterfeiting you’re going
to need strong laws and strong enforcement. For safety, you
either are going to have to pass stringent backing requirements or
you’re going to have to have explicit — and I should have put in
the word ‘‘government’’ — insurance.
I think that you might try to take the position that we will not
bail out e-money issuers, but I think that when a crisis arises,
you’re going to find that the pressure to bail out and give people
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Banking, Trade and Commerce
27-3-2014
their means of payment back is going to be extremely strong. I
would think that either you’re going to need stringent backing or
explicit insurance.
If you want to guarantee par exchange, you’re probably going
to have to step in with some kind of par clearing mechanism,
either requiring the issuers to accept each other’s instruments at
par or else set up some kind of government clearing house.
That concludes my remarks.
The Chair: Thank you, Dr. Weber. It was an excellent
presentation for us. We have a number of questions and just
over half an hour.
Senator Tkachuk: Thank you very much for that presentation.
I have just a couple of questions.
With all the banks having their own currency and at different
rates, how did they make it useful in the community? In other
words, how did a storekeeper or a person selling a piece of
property decide on what currency to take? If someone brought
currency from a different bank to purchase, how did they
communicate what they thought the currency would be worth?
Mr. Weber: If someone was bringing in a note from a local
bank, they probably took it at par. In other words, if something
was priced for a dollar and someone brought in a dollar note,
then that was fine.
If someone showed up with a note from outside the local area,
then probably this merchant had one of these Bank Note
Reporters and Counterfeit Detectors underneath his counter. He
would pull it out and say, ‘‘Ah, I see the discount is 5 per cent,
according to this publication, so you’d better given me a dollar
and five cents for that, or no transaction.’’
If they did not have one of those, I don’t know exactly how
they figured it out. They made some kind of guess. Let’s suppose
this was a merchant in Philadelphia and someone came in with a
note from Columbus, Ohio. My guess is that he would think in his
head, ‘‘Well, what am I going to do with this note? I’m probably
going to take it and give it to my bank. How will my bank cut that
note?’’ Probably they’ll try to figure out how expensive it’s going
to be for them to get it back to Columbus, Ohio, get some gold or
silver for it and get it back to Philadelphia.’’ They would do some
kind of calculation like that.
What is interesting about reading these Bank Note Reporters
and Counterfeit Detectors — and I’ll give a plug to my website,
through minneapolisfed; I have several thousand issues of these
actually. What I’m surprised is how small these discounts actually
were. In most cases they were less than a per cent, if it wasn’t too
far away. But they did vary and they varied a lot, over time.
27-3-2014
6:51
Senator Tkachuk: The second question is more on the ecommerce currency. You mention counterfeit or hacking or
requirements for insurance and that maybe governments would
be involved. Should governments be involved at all? The
governments already have a currency. We have our currency in
Canada. The Americans have their currency. All countries have
their own currency. If there is another currency that’s out there,
should we just leave them, let the buyer beware and let the risks be
taken? Why would we be involved in insuring e-currency that has
nothing to do with the currency that the government is backing
with its own resources?
Mr. Weber: My answer to that is, there also are demand
deposits out there, which are a medium of exchange that has
nothing to do with the government, and yet we insure those. The
reason we insure them is because when banks start to fail or
there’s a big chance of banks failing and people have a risk of
losing a great deal of money because of that, there is a demand for
the government to do something, to protect them.
The reason I think you’re going to get involved with insurance
is to put it in first so that you could set up premiums and all of
that, rather than waiting for a crisis to hit, some e-money issuers
get into trouble and now there’s this huge demand for the
government to do something, ex post.
Senator Tkachuk: The government asked the banks to pay for
the insurance.
Mr. Weber: I would expect the government to ask e-money
issuers to pay for that insurance.
My answer comes from past experience with demand deposits.
I don’t think a government can credibly commit to say they will
not bail out e-money issuers and therefore put the insurance on.
Senator Tkachuk: Got it. Thanks.
Senator Massicotte: Thank you very much for being with us
this morning. This is our second day of testimony on this issue
and it’s very interesting, but it’s also something I’m not sure we
fully understand.
You basically dealt with the currency history as it evolved in
the United States. However, I want to go back to talk about the
bitcoin and determine whether we understand it. Yesterday we
were told there are approximately $8.4 billion of bitcoins in
circulation in today’s valuation, but a lot of that has been created
from the fact that people who did transactions were incentivized
to do transactions in bitcoin and therefore they were given that
electronic currency. Therefore, most of that $8.4 billion is not
backed by any hard dollars of any sort of currency, but rather a
large part of the $8.4 billion is money created just for the system
based upon algorithms whereby they are convinced you won’t get
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Banking, Trade and Commerce
27-3-2014
a net retraction. They actually project that this will grow for the
next 15 to 20 years and will nearly double in size based on some
algorithm or re-projected use.
Having said that, if ever there was a net reduction of bitcoin
circulation and the net withdrawal is significant, we could find
ourselves with no cash available to convert because most of that is
not real cash. There is no hard currency or gold or whatever
backing up that deemed currency.
Is that a little bit like a Ponzi scheme whereby it’s all very good
when it grows but it will fall apart if it’s reduced in size a little bit?
Mr. Weber: I don’t claim to be a bitcoin expert. There is a
fundamental difference between bitcoin and the state banknotes.
As you point out quite correctly, bitcoin is not redeemable into
anything. The state banknotes were redeemable into gold and
silver coin.
The rest of your question is excellent. I’m not sure how bitcoin
would get withdrawn because it is irredeemable. It’s kind of like
central bank money, like Bank of Canada notes or Canadian
currency. It’s not backed by anything. You’re right, though, in
that there’s no regulator out there that will say all of a sudden we
should have less of it in the system or more of it in the system
because we want to achieve this particular monetary policy goal.
I think if it gets withdrawn from the system it will be
withdrawn like Mt. Gox and the failure and losses there. I think
there are some other cases, but I forget the name of the institution
that also thinks it lost several billion bitcoin.
I really don’t have a great answer to your question, but there is
nothing in the experience that I know that would directly relate to
that particular issue.
Senator Massicotte: You make comparison to currency in
Canadian dollars or American dollars. In those cases you have a
central bank or a government saying you can trust these notes.
Yes, you’ve got countries like Argentina that publish a lot of
currency and then you get inflation, but irrespective of it is the
credibility of a country or a central bank saying you can trust it.
That’s why they were created. That’s why the state bank currency
as it exists is saying you can trust this. However, with the bitcoin,
if I go to the store, there is nobody saying if I take a bitcoin I will
be able to buy a television. It seems to me that if that occurred
and for some reason the cash was not available at that store, you
could see $8.4 billion crumble to nothing with just a news article
saying, ‘‘Oh, oh, lack of currency, lack of liquidity.’’ There is no
central bank supporting it and it could disappear overnight. Am I
correct in saying that?
27-3-2014
6:53
Senator Massicotte: Much like a Ponzi scheme: When it grows
you’re doing well but if it retracts there are big problems.
Mr. Weber: Well, I’m not sure I would call it a Ponzi scheme,
but I certainly think it’s based people’s expectations and on the
idea that I take it because I think I can pass it on to someone else
who will take it. If that expectation crumbles, yes, the whole scene
becomes valueless.
[Translation]
Senator Bellemare: I speak French, but I will try to ask my
question in English. It may not be completely clear, but I will
speak slowly.
[English]
I want to know about the problem of parity in the clearing
system, but I’m interested in the bitcoin problem. Yesterday we
learned that you can exchange a bitcoin in a country at different
rates. It depends on the clearing mechanism. You talked about
this being problematic for the 19th century system, but now we
have a lot of technology.
Could it happen that a clearing mechanism developed so that
some people will buy bitcoins when it’s slow and will sell them in
Vancouver, or a kind of a speculative system so that parity with
the bitcoins establishes very quickly in a country that uses the
Canadian dollar, for instance? Do you have some comment?
Mr. Weber: That’s a great question. It does relate to the system
that I was talking about because you have the same possibilities
for speculation with the state banknotes that you would have with
bitcoin in two different locations. You would think that someone
could take the notes of, for example, banks in Cleveland and take
them to Philadelphia and get gold for them there and take it back,
but this is costly. Especially back then, transferring gold was not
safe. It took resources and time. The same kind of thing may keep
exchange rates from being equalized in those two locations.
The other thing that I found, and we studied this, was a
revelation to me at first. We took a look at what the discount was
on Cleveland notes in New York and what the discount was on
New York notes in Cleveland. You would think it was just the
cost of transporting them and they ought to have been the same,
but we found that Cleveland notes were going at a 5 per cent
6:54
Banking, Trade and Commerce
27-3-2014
discount in New York but the New York notes were going at par
in Cleveland. We were wondering why. If you are in Cleveland,
getting a New York note is really good because you can take it to
New York and there are a lot of things you want to buy in New
York. If you’re a New Yorker and you get a Cleveland note you
won’t find as many things you want in Cleveland. The one thing
that may keep it from quite equalizing is how much you want to
spend in that other location. There is more to it than simply
transport costs.
Senator Bellemare: You’re saying there is more to it than
technology. If in a location in Canada bitcoins are not popular
then this kind of equalization system could not grow by itself. It
needs a market in every place.
You talked about ‘‘too big to fail.’’ We guarantee the financial
system, the banking system, because it’s important. From your
historical knowledge, do you see a link between the popularity of
e-money and the financial crisis that we had in 2007? Is it
something that we have to think about, or is there no link at all?
Mr. Weber: That’s a great question. Off the top of my head, I
cannot see a link. The financial institutions back then were quite
small. There were so many of them and they were very, very small.
There wasn’t the same concentration that there was in the 2007
crisis.
My comments about ‘‘too big to fail’’ really were if you have a
large financial institution and they add this e-money capability to
it, to me, they become much more systemically important because
if they fail, all of this e-money could lose a great deal of value. So
the pressure on government to do something would be much
greater.
A very big bank, relatively big for Philadelphia, did fail in
1857, and there was no pressure there for any kind of government
intervention except to punish the people who they thought had
committed fraud, but no ‘‘let’s make everyone safe.’’
Your question is a great one. It would require a lot of thought
and research.
Senator Ringuette: I really appreciate the history that you have
brought us. We’re talking about bitcoin, but yesterday we were
told of there is also litecoin, Linden Dollars, Liberty Reserve
Dollars, Pecunix.
Senator Massicotte: As of 24 hours, there are Massicotte
dollars for those who want them.
Senator Ringuette: There seems to be a proliferation of
different e-currencies. Given that and the history and evolution
that you described to us, would it not be wise for federal reserves
of industrialized countries to issue their own e-money that would
27-3-2014
6:55
be backed just like the physical currency that we’re using? Would
that not be the next step, considering the history of banknotes in
the U.S. that you have just indicated to us?
Mr. Weber: Once again, a great question. To the extent that
people get accustomed to using e-currency, if the central banks
want to continue to maintain the revenue that they get from
currency, they will probably have to get into that business, yes.
Senator Ringuette: From your knowledge, is the Federal
Reserve looking into this, sooner rather than later? Or should
they, and should Canada?
Mr. Weber: From my knowledge, I don’t know about the
Federal Reserve system. I have heard that there are institutions in
Canada that are looking into this. I know from my time at the
Bank of Canada that they are actively researching the question of
should the central bank or some other government entity get into
the e-money business, but those are really deep, hard questions.
Part of it is predicated on what you think will happen to the
demand for the standard currency today if these e-monies start
growing and become popular. As I said earlier, if they start
becoming quite popular and heavily used and the actual demand
and usage of Bank of Canada currency or Canadian government
currency starts falling dramatically, then I think they will
definitely have to get into that business.
Senator Black: Thank you very much for your presentation,
Dr. Weber. It has been helpful. I would like to ask you a couple of
practical questions to start with and then, subject to your
concurrence, a couple of crystal ball questions, if you are
comfortable with that.
As you know, we’re charged and have taken upon ourselves to
review digital currencies. I have taken from your testimony that
the suggestion to us would be, by reviewing the state banknotes
and the history that you have gone through with us, that there
might be some learnings for us around digital currencies. Is that a
correct assumption?
Mr. Weber: Yes. If I understood you correctly, I think there is
a lot to be learned from that period in terms of setting up
arrangements for exchange and for insurance. By studying them
more closely, we can learn things about mistakes not to make
today or things that should be done today to achieve what I think
a lot of people would say are the goals that we should have for
those kinds of monies.
Senator Black: That’s why your presentation has been so
helpful. I just wanted to make sure that we were aligned on that.
When you talk about e-money, is that term, in your mind,
interchangeable with digital currency?
6:56
Banking, Trade and Commerce
Mr. Weber: No, it’s more restrictive. Under my definition of emoney, bitcoin does not qualify. It would be a digital currency but
there is no claim on the issuer. Here I’m taking my definition
really from this committee on payments and settlement systems of
the BIS. Under their definition, an e-money has to be a claim on
the issuer. Bitcoin is a claim on no one, as was just pointed out, so
I would say there is a difference. You could have a digital
currency that would not fall under that definition.
Senator Black: Thank you.
27-3-2014
Mr. Weber: I focused my comments and title with e-money. I
don’t see how the state banknote experience applies that much to
something like bitcoin.
Senator Black: Can you then help us understand where the two
universes overlap? In your definition, where is e-money a digital
currency, so we can understand how we can apply the information
you’ve provided us?
Mr. Weber: It’s a digital currency in the sense that the value is
stored on some device. With banknotes, it was stored on a piece of
paper. From my definition of e-money, it’s stored on your
cellphone, on a jump drive on your computer, something like that,
some electronic thing. It is stored in a digital form. That would be
where they overlap.
Senator Black: Presuming, then, that we move forward with
some form of digital currency and regulation, et cetera, would
you have any bars to entry or any regulations around who can
enter the marketplace and be a provider of digital currencies?
Mr. Weber: Yes, I think I would. I have to think for a minute
about exactly what they would be. Again, it depends. If you are
going to insure it and have government insurance, you certainly
would want to make sure that the people coming in would be
legitimate and could pay for the insurance. If you’re going to
require that it be redeemable on demand, you would like to be
sure that they have the resources to do that. I would vet the
issuers.
Senator Black: You would encourage us to look at some kind
of regulations around entry into the marketplace.
Mr. Weber: Yes, I think I would, but that’s something I would
like to think about more deeply.
Senator Black: Would it be appropriate for us to ask that, after
you have done some of that thinking, you provide us your
thoughts?
Mr. Weber: Sure, I would be happy to.
Senator Black: A couple of crystal ball questions if we can.
Going forward with a digital currency, what role do you see it
playing in the economy?
27-3-2014
Mr. Weber: With digital currency, I am struck by the
information advantages that it has over regular currency. With
digital currency, you have the ability to carry along a great deal of
history about the person who has it in terms of what they like to
buy, where they seem to like to buy, things like that, so that it
offers the issuer the ability, as credit cards do today, of offering
loyalty points or different discounts for where you shop and
things like that. You could have some kind of credit history of the
person on there so that you might think this person is more credit
worthy and therefore you would be willing to do this for them or
something else. I see it opening tremendous possibilities for
changing the way things are priced and the way transactions are
made which may do a great deal for improving economic
efficiency. .
Senator Black: That is very interesting.
Mr. Weber: There is some interesting work being done by some
people at the Bank of Canada right now, trying to more formally
model this. I am kind of stealing some of their stuff in my
comment to you.
Senator Black: We will likely be on their trail, too.
From Canada’s point of view, is there any advantage to the
country in being a global first mover in terms of recognizing and
regulating digital currencies?
Mr. Weber: You guys ask fantastic questions.
6:57
Off the top of my head, there are some disadvantages, one of
which is you might make mistakes, and if you wait somebody else
will make those mistakes so you don’t pay for them.
On the other hand, you might find that your e-monies can grab
a larger share of some international markets because you have
been the first there. Again, without more study or more thinking,
I can’t say which one outweighs the other, but I can see
advantages and disadvantages to being an early mover or a first
mover.
Senator Black: You have been of tremendous help.
Senator Greene: Senator Black has asked a bunch of questions
that I was going to ask you, but I’ll try a philosophic question,
and that is whether bitcoin or e-currency ought to be regulated at
all. They exist on the Internet and the Internet is difficult to
regulate. Western countries in particular have an aversion to
regulating it. In my view that’s a good thing. Bitcoin is kind of a
libertarian initiative. On that basis, because it’s on the Internet, I
think it’s likely that regulations are going to be difficult to apply
and easy to circumvent. On that basis, do you think we should
even try to regulate it?
Mr. Weber: My comments on that go back to the point I made
a couple of times. If I thought the government could credibly
commit not to intervene if people started taking big losses on
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Banking, Trade and Commerce
27-3-2014
these, then I would say fine, stay away; you don’t need to regulate
or supervise. My fear is that an event could happen that is big
enough, and that happens to the people of Canada or the United
States, and the hue and cry is so large that the government cannot
avoid doing something and the cost would be very high from
doing that. However, if the bitcoin issuers or holders had been
regulated from the beginning, that event would not have
occurred.
That’s my fear. It’s really all based on what I think the pressure
is going to be on the government to do should there be a crisis
event, a bad event, in terms of the value of one of these digital
currencies.
Senator Greene: Do you think a public education initiative
emanating from the government about the dangers of e-currency
would do the job?
Mr. Weber: It would certainly help. Would it do it completely?
There are instances where people have put money in non-insured
savings and loans in the United States. They have gotten into
trouble and people said, ‘‘Oh, I thought they were insured,’’
whereas they have been told all the time that they were not.
I think the education would help and might lessen some of the
need for regulation, but I am sure there are people out there who
will still make the argument. Maybe they will not be 100 per cent
truthful about the matter and say, ‘‘Yes, I know what you said,
but I really didn’t understand how big the risks were. Look,
you’ve wiped out my entire life savings. I need help.’’
Senator Ringuette: As a follow up to all these questions in
regard to regulating, I guess the bottom line for the Bank of
Canada to look at is this: Is it easier and safer to compete, that is,
to issue your own e-money or try to regulate? There is a question
of security, and you keep coming back to the fact that, whether
the government likes it or not, if this bitcoin or other similar
entity grows in the country and they fail, it could create an
economic crisis of some kind so that the government would have
to intervene. On the other hand, you are indicating that is going
to be very hard to regulate.
Is it not the solution to provide our citizens with a securely
backed e-money product?
Mr. Weber: You make a good argument for having the
government in. It is expensive for the government to get into
the business to set up the infrastructure. You have to weigh those
costs against the costs that the government would incur should it
be all a private system and there is a failure and the government
has to intervene. Off the top of my head, I can’t tell you which
cost is bigger. With setting up government e-money, a lot of
infrastructure has to be put in place.
I guess I would not argue for completely prohibiting private emonies because you might find that the private sector is very good
at innovating and might come up with innovations that, if you
have a government e-money, they could end up using and making
it less expensive. However, in terms of the bottom line you have to
27-3-2014
6:59
say here is the cost of regulating private ones; here is the cost of
setting up the government one. Which is bigger? Then you have to
go with the lower cost. I do not have the expertise to come up with
those numbers and I don’t think any one person would right now.
I think a lot of study has to be done on that.
Senator Bellemare: From your historical experience and
knowledge: We know that e-money is used for exchanges, and it
could also be used for storage of value. But could it also be used
to promote credit?
Now, as we see it, to get bitcoins, you need value; you need
dollars or you need to get the bitcoins. With Canadian or
American dollars, you go to the bank and you can have a loan.
Do you think that this side of e-money could be developed, or
not?
Mr. Weber: Certainly, I think it could. Again, I was using this
very restrictive Committee on Payment and Settlement Systems
definition, where they did not allow credit, so then they would
rule out credit cards. But in some sense, credit cards are a form of
e-money with that credit feature you talk about, so we really
already have that. One of the questions is: Given there are credit
cards out there, how much e-money is actually going to develop?
Why don’t people just use credit cards instead?
The Chair: That concludes our questions, Dr. Weber. On
behalf of each member of the Senate Banking Committee, I would
like to express our great appreciation for your participation
today. We are on a steep learning curve. You have been very
helpful. I must commend the members of the committee for what
I would term outstanding questions.
With that, we will terminate this part of the meeting. Thank
you again, Mr. Weber.
Mr. Weber: I agree; the questions were great.
The Chair: During this second hour today, we have, via video
conference, Dr. Joshua S. Gans, Professor and Area Coordinator
of Strategic Management at Rotman School of Management at
the University of Toronto. Dr. Gans also holds the Jeffrey C.
Skoll Chair in Technical Innovation and Entrepreneurship at the
Rotman School.
Dr. Gans’ research is primarily focused on understanding the
economic drivers of innovation and scientific progress, and he has
core interests in digital strategy and antitrust policy. He writes
regularly on these topics and has co-authored a paper for the
Bank of Canada entitled Some Economics of Private Digital
Currency.
Dr. Gans, thank you for appearing before us. The floor is
yours, sir.
6:60
Banking, Trade and Commerce
27-3-2014
Joshua S. Gans, Professor and Area Coordinator of Strategic
Management at Rotman School of Management, University of
Toronto, as an individual: Thank you very much for
accommodating me by video conference. As your introduction
already showed, my background is as an economist. I’m actually a
fairly recent immigrant to Canada, having come here almost three
years ago from Australia.
My interests are fairly varied, but I have previously appeared
before the committee of the Australian Senate, similar to this one,
on issues of credit card regulation and banking competition.
What I’ve been looking at this time has been the increasing
interest in digital currencies.
My interest in this began because of my co-authorship with
Hannah Halaburda, who was at Harvard University and is now a
researcher at the Bank of Canada. We had noted that there was a
lot of discussion in the media regarding the role of things that
were starting to look like digital currency. These things weren’t
what I guess we will end up talking about today, things like
bitcoins, but in fact things that were associated with platforms.
A great example of this was something called Facebook credits.
Facebook credits were virtual things you could buy by sending
money to Facebook, which allowed you to purchase extra things
in Facebook games. Commentators had looked at that and had
looked at Facebook’s huge reach and wondered whether
Facebook credits could develop into something like a
competing currency, whereby you wouldn’t just use Facebook
credits to buy sheep in farm games or something like that; instead,
you would use them to buy real goods and services. The people
being paid in Facebook credits could then convert them back into
their local currencies.
There was an enormous amount of discussion about this in
very reputable media circles, thinking this could be a big
challenge, for instance, to the U.S. dollar, so we undertook to
look at this as part of the National Bureau of Economic
Research’s digitization project.
To put it in a nutshell, we found that in order to have a
competing currency, you have to be able to take local currencies
and convert them into that currency and then also convert them
back. Facebook credits and some of their ilk, such as those that
have been brought forth by Microsoft in its day, and also by
Amazon and others, allowed you to buy those credits but didn’t
allow you to take them back out. We found that that was for
good reason. If we take into account what those businesses were
all about, which is getting activity on their platforms, that activity
would be maximized by allowing people to buy credits in and not
allowing them to take it out. So we predicted that these currencies
wouldn’t come to dominate the world and would be rationalized
and probably subsumed by conventional forms of payments once
easy credit card payments and other things were worked out, and
27-3-2014
6:61
that is largely coming true. No one talks about that any longer,
even though this research was only done two years ago.
At the same time, of course, bitcoin was starting to get noticed,
and we made a conscious decision to ignore it in our paper. That
decision was made because it was only a recent phenomenon, and
at the time we weren’t sure it was going to stick around very long.
Obviously today we can sit back and look at that and
determine things have been coming to pass. Bitcoin has at least
established some sort of longevity and, moreover, there is a lot of
enthusiasm not just about bitcoin itself necessarily but about what
it represents in terms of an innovation in digital technology.
I should preface all this by saying there’s something very
interesting about how people approach bitcoin. Many economists
have been very dismissive of it. The argument is very simple: Why
do we need it? Traditional currencies are great. Why would we
need this other thing, except maybe for nefarious purposes, but
even there, cash is still pretty good for money laundering, as is
gold or something else.
What I noticed is that the people who were taking bitcoin very
seriously were those schooled in computer sciences, and they were
very excited by it. I must admit that I’ve staked my career on
occasionally saying that if no economists seem to be excited about
something, maybe it’s time to take another look. A few months
ago, that is precisely what I did and wrote what turned out to be a
fairly influential blog post about this.
The main conclusion — and we can take the discussion of this
in any direction you might see fit — was that bitcoin itself may or
may not be significant, but the innovations that underlie it are
very interesting. Essentially, they take away some of the key roles
that have been previously played by banks, governments and
other financial institutions and decentralized them basically to a
peer-to-peer, as they call it, decentralized framework. In other
words, they get rid of the middleman in many of the transactions
that can occur. This opens up the possibility of reducing the
transaction costs associated with the transfer of money between
parties. While we have always enjoyed money because it has been
fairly easy to transact when people are in the same room, when
you get beyond that, it has always been more of a struggle.
What bitcoin and other crypto-currencies may represent is a
means of reducing the transaction costs, if not to zero, then very
close to zero, and improving the speed of transferring money from
24 hours to mere seconds.
So that’s basically where I’ve come to on this. I’m not
100 per cent sure of the issues that you’re confronting, so I leave
myself in your hands.
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Banking, Trade and Commerce
27-3-2014
The Chair: Thank you very much for your opening comments.
Could you anticipate a situation where virtual currencies really
achieve large-scale adoption?
Mr. Gans: I think it’s hard to anticipate a situation where they
do not, and it’s not just me saying it. That was a forecast made a
decade to a decade and a half ago by Milton Friedman, who
arguably is the greatest monetary economist of the 20th century.
He basically said that when it comes down to it, money is not real.
Keynes famously said, why would anyone outside of a lunatic
asylum believe that money is a store of value? Whenever I think
about it or my colleagues think about it, that becomes true.
The big issue has always been in making that digital. It has not
been that we can have digital ledgers and we can have electronic
transactions where we never see a physical form of money or a
physical contract; that goes on all the time now.
The big issue has always been: How do we ensure that people
are not getting ripped off? Essentially, when I hand you a dollar in
cash, you get that dollar and you can use it and I can’t. When I
send you a dollar virtually, what’s to stop me using that dollar
again, basically convincing somebody else I’ve got money when I
don’t have it? The previous way we solved that with electronic
transactions is we have clearing houses or bank agreements and
other things that are essentially honouring contracts to pay
backed up by real things.
What crypto-currency does, essentially, is solve that double-use
problem by verifying the transactions have taken place and
ensuring that the ownership of a particular piece of virtual
currency or anything digital has actually taken place.
Once you feel that that problem has been solved, it’s hard to
imagine why we would ever want to carry around physical cash or
do any of this stuff physically. Can I imagine it? Absolutely.
Senator Black: Dr. Gans, thanks for being with us and thanks
for coming to Canada. This is very helpful. You must be
wondering a little bit these last couple of months why you took
that decision, but we’re glad you’re here.
Building on the excellent question of our chairman, taking
what we just had a conversation on, let’s assume that digital
currencies are here to stay. Are you okay with that assumption?
Mr. Gans: Yes.
Senator Black: Help us, then, as senators to understand what
role the Government of Canada or the Bank of Canada should
play around digital currency.
27-3-2014
6:63
Mr. Gans: There are a few levels on which we could take this.
The first issue is that when these virtual currencies emerge — and
bitcoin is a great example — they appear to not have to merge
with the backing of any government. On the one level, this opens
up the possibility that governments may lose control in the future
of the money supply. That may not be a role for government, but
that’s at least what people have talked about.
Now there’s one reason not to be so concerned about that, and
that is taxes. If I live in Canada, I need to pay my taxes in
Canadian dollars. So as long as the government is saying that that
is how we should do things, there will be a role for the Canadian
dollar.
At the same time, some of the roles these other currencies
might play may disrupt that and they may raise concerns about
how easy it is to do transactions outside of the reach of
government. We know ever since taxes were invented that
people have wanted to be secretive about their transactions
from the government. We should expect that somebody is going
to work out a means to do so, and if an innovation like this comes
along that presents that possibility, then there is a reason to
monitor it.
The bitcoin has actually gone through waves. It was initially, of
course, asserted that this was a perfectly anonymous way of
transacting where you did not have to disclose your identity, so it
would be a great means of avoiding the eyes of the government or
anyone else. But as it turns out, bitcoin is actually one of the more
public ways of transacting than has ever been invented because
every transaction is listed in a ledger, as that is central to the way
bitcoin works. That ledger has to be verified and updated in order
for currency to be transferred. That means as soon as someone
identifies you, they don’t just identify you right now, but they
identify all the transactions you’ve engaged in in the past. In
effect, from that perspective, it’s like the government or NSA’s
dream. You could audit everything. From that perspective, that is
maybe not a concern and maybe is a virtue. But there is a
watching brief that surely has to be established on this, no doubt
about that.
On that same score, I say ‘‘watching brief’’ because there is
really the potential for a lot of innovation to take place here. This
is one of these areas where no one really has a great handle on
what is going on but enough people think, ‘‘Oh, there is
interesting technological progress being made.’’ So in terms of
the role of the government, the desire would be not to stifle that.
It would be very easy for governments to be concerned about
these things and put in regulations that would reduce the
development of crypto-currency in their jurisdiction. My hunch
is that that would be an error, that at the moment this poses no
systematic risk. It’s not clear what risks they are to tax revenue,
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Banking, Trade and Commerce
27-3-2014
and so being more open and permissive would seem to be the
default.
The second broad tranche in terms of what Canada could be
doing is why the Bank of Canada isn’t taking some of these
technologies as a means to launch its own currencies. Why isn’t a
digital form of the Canadian dollar being considered? Would that
be the way to go? In other words, if our concern is that this thing
is not government-backed or government-sponsored, there is no
barrier to it being so.
Senator Black: Thank you very much. The last point was very
interesting, and I suspect you’ll hear a bit more on that.
I’ve asked another witness this: Do you believe there is any
advantage, and if so, would you elaborate on the advantages to
Canada being a first mover in respect of regulating digital
currencies or encouraging digital currencies, from the point of
view of innovation?
Mr. Gans: When you use regulation, it has a bad connotation.
Encouraging innovation in general is something that I would be
thinking about.
I think Canada actually, as is often the case, represents the
chance to remove some constraints and foster development. I’ve
seen this here in Toronto and across Canada in the development
of quantum computing, which, by the way, is something very
complementary to the development of crypto-currencies, mainly
because there have been no concerns about technology transfer to
powers that might be against the national interest.
I see the development of crypto-currencies as perhaps playing
the same sort of role. This is use of digital means for financial
transactions in general. Crypto-currencies are only going to be
useful to people if other people innovate on the back of them. At
the moment, bitcoins are notoriously hard to get. You actually
have to go through a lot of effort to get bitcoins, and there’s the
whole uncertainty and things like that.
The way it has developed has been entrepreneurs acting as
intermediaries between ordinary people and being able to transact
in bitcoin.
This could happen with other crypto-currencies as well. People
could innovate off of the back of them. For instance, let me give
you an idea. One of the benefits of crypto-currencies has been that
you can develop currencies that can be more limited in their scope
of use than ordinary cash. For instance, as a parent, I would like
to give my children dollars; I like to give them an allowance. I
don’t want them spending it on bad stuff, whatever that might be.
Some entrepreneur could launch a crypto-currency that allows me
to transfer currency to my children but not allow them to buy
27-3-2014
6:65
certain things, and I could do that. We would not want to stifle
that sort of innovation. I am thinking of that as a parent but you
can imagine how far this could go. This could go all the way to
thinking about how instead of my having to claim my child’s
fitness tax credit every year, the Government of Ontario could
hand me some currency that could only be spent in certain ways, a
cheap means of coupons. We can think of a lot of different ways
this can go, but it’s entrepreneurs that will do it, so you want to be
encouraging of that sort of thing.
At the same time, there is this sort of merit to government
sponsorship as well. The government has a lot of credibility in this
space. So the government could think of ways of setting up
institutions and verifying them that give people confidence in
what they are doing, much as it does with the banks, of course,
today.
Now, I have to draw the line a bit. Coming from Australia, one
of the things that I found frustrating, both in the United States
and here in Canada, is how hard it is to transfer money. In
Australia, for reasons that I’m not quite clear of how it evolved, if
I want to transfer money from one bank account to any other
bank account in Australia, it is dead simple, easy to do. I just have
to have the bank account details and it happens overnight every
time. The same is not true here in Canada. The same is definitely
not true of the United States. So one of the issues we have to ask
ourselves is why that’s the case, and is there something standing in
the way of innovation on essentially legitimate means of payments
that the crypto-currencies and what they represent could allow us
to think about.
I have to admit I don’t know enough about the Canadian
banking system to know that. It has a lot of virtues but one of
them isn’t this part. So the question is whether in the broad review
this committee might take of how easy it is just to make payments
for stuff, whether it could look at those sorts of things.
Senator Black: Thank you very much.
Senator Tkachuk: Thank you for your presentation. We receive
a few background papers from our own researchers, and there’s
an interesting paragraph in one of the pieces, which states that the
supply of bitcoins isn’t determined by central authority, but it has
increased at the rate of roughly one bitcoin every ten minutes as
bitcoin miners verify the validity of the transaction. The
interesting thing is, it says that there will be an end where there
will be no more bitcoins produced. Is that infinity, or because it’s
done mathematically, can there be an actual date as to when it no
longer will be produced?
Mr. Gans: I believe it’s not infinity. I could be getting this
wrong, but I think it’s in the order of 21 million. It gets
increasingly harder as time goes on to mine these bitcoins, and I
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Banking, Trade and Commerce
27-3-2014
think the bitcoin system within some decades will reach a natural
end and no more bitcoins will be produced. People have forecast
that.
Many years ago, it was really easy to get bitcoins, really easy to
mine them. It has been progressively difficult.
The mining has this other element that it takes a lot of
computing power, which uses electricity, and it’s not clear that is
something we want. It might be just plain wasteful.
The broader issue that people have discussed with regard to
crypto-currency is this money supply issue. To tell you the truth,
we economists are all supposed to know something about money,
but as soon as we start to think about it, we know we don’t know
very much. The people who designed bitcoin actually knew quite
a bit about it. It’s quite astonishing to me when I think about
what they have done.
But the one issue that has come back is what happens if there is
just a fixed supply of it? There is a fixed supply of money and
people start using it a lot more, so doesn’t that mean that the price
of that money goes up, which means, effectively, from an
economy-wide point of view, in terms of that money we get
deflation, and no one likes deflation. Deflation is the sort of thing
that seems to be associated with recessions, depressions and other
problems.
So traditionally we have expanded the money supply —
Canadian dollars, U.S. dollars, et cetera — to keep abreast with
the amount of transactions so we have some stability. If you have
one of these decentralized currencies with a finite limit, what
happens? Are they inherently limited by that deflation?
Generally speaking, economists have been saying things work
themselves out, don’t worry about it, and they would be right.
The alternative is in order for one of these currencies to work and
be relied upon, they have to foster price stability. If there is builtin deflation, that’s just as bad as built-in inflation. Maybe the
crypto-currencies and digital currencies that take off are ones that
are managed carefully to ensure that doesn’t occur. Maybe it will
turn out that while a lot of things can be decentralized about these
things, we do need some central backing. It’s not a big leap to say
that that backing should be a government or a central
independent monetary authority that’s disinterested rather than
a private player that’s interested.
Senator Tkachuk: If there is an end, could they say, ‘‘Well,
that’s that ledger, let’s start again from zero’’?
Mr. Gans: There is no reason why there couldn’t do many of
these things. We have a lot of assets that are valuable now. We
have Canadian dollars. I can happily hold U.S. dollars; I’m not
27-3-2014
6:67
worried about that. It’s harder to find people to pay around here,
but it is not impossible. I can hold gold, silver, platinum, stocks
and bonds. There are all sorts of things that are currently assets
that we can use to pay one another. There is no reason to suppose
there couldn’t be multiple currencies that are valuable in this
regard.
You’re right; if bitcoin had inherent deflation, you have to say
deflation with respect to what? Would other currencies and things
come up and play that role? I’m not so sure about that. We’re in a
new world.
There is this other residual concern about can we really have
these multiple currencies or is there some scale of economy or
what they call network effect that drives us all to have one
currency? Will that end up being one of these virtual ones? I’m not
sure about that.
History has told us that while there are great local reasons to
have a similar currency, there is no necessary reason why different
regions can have different currencies, and they can be multiple
competing things. I’m not sure whether we will get dire scenarios
from that or it is going to stifle innovation, but precisely what the
world will look like is hard to say.
Senator Ringuette: We have a saying that necessity is the
mother of innovation, or invention, but do you find that all these
crypto-currencies have come about, yes, because of innovation
and technology, but that there is a requirement in the marketplace
for an easier trading currency?
Mr. Gans: I think your starting point about necessity being a
driving force is an apt one. There is a sense in which thinking
about ordinary people transacting in ordinary ways with credit
cards, debit cards, and other things, what’s the big deal?
It’s another matter when people have to transact across
international boundaries. With respect to small businesses, if you
have a small Canadian business exporting to Asia, one of the
things they have to worry about is remittances; currently they can
lose several per cent of their revenues in just transacting
internationally.
We have to ask ourselves in this day and age why that should
be the case. Why should we be taxing it? This is not a concern for
big companies. Big companies have been able to get this down to
what the banks can get. At the moment, small companies have to
pay their local bank, and whoever they are transacting with has to
pay their local bank. All those fees add up. It may only look like a
few per cent, but a few per cent is a few per cent, and that’s
enough to give people pause.
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Banking, Trade and Commerce
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International transactions are an area where innovation in
virtual currencies seems to have the greatest potential payoff.
Let me just add one thing: That is an innovation that may
interest Canadian banks as much as independent parties. While
Canadian banks may be able to charge fees at this end, the
amount of transacting is reduced because somebody has to pay a
fee at the other end to another bank. I can imagine a world where
Canadian or U.S. banks or something else would be interested in
these innovations themselves because it reduces the cost of
transacting and attracts more business their way.
Senator Ringuette: We have to give very serious consideration
for the Bank of Canada to move forward in their own cryptocurrency that would be backed and secured for the citizens and
business transactions. With the bitcoin model, we would be
removing the Canadian chartered banks from the scenario.
Mr. Gans: That is one way to think about it. The other one
that would require more of an expert in computer science is
whether that’s necessary at all if the Bank of Canada were going
to do it.
The hallmark of bitcoin is that there is a ledger of transactions
to verify that things have been exchanged. We have those ledgers
currently residing within banks. The Bank of Canada has its own
ledger, and we have physical money as well.
What would happen, just to speculate, if the Bank of Canada
were to launch a currency and the Bank of Canada were to hold
and verify the ledger using the current techniques that have been
solved to set up bitcoin? It could be secure; there will be a vault; it
will pass through the Bank of Canada. So there will be no issue of
those sorts of problems. We can go crazy on this.
I can imagine the people at the Bank of Canada would be
salivating over the prospect that every transaction in the
Canadian economy would go through the Bank of Canada. It
might not be attractive to everybody, but there are a lot of people
it would be attractive to, and so Canada would know its GDP
every minute.
Senator Ringuette: Wow. Thank you.
Mr. Gans: There is something going on here. Don’t stop. The
worst thing that could happen is that the Bank of Canada
investigates this and finds that it can’t make it work. But there is
so much potential upside here that there could be a legitimate set
of transactions.
Also the Bank of Canada is part of a legitimate, stable world
government of which not every government in the world is, and it
could become a clearing house for many transactions in that way.
So there could be even more to it than that, just to go crazy on
thinking about that.
27-3-2014
6:69
The Chair: I might indicate that the Bank of Canada will be
before us next week.
Senator Tkachuk: With the Bank of Canada getting into it, the
Bank of Canada and the Government of Canada have a very close
relationship. The reason that people want currency outside the
system is they want governments not to be involved in it. As soon
as governments get involved in it, it’s no longer a currency that’s
outside the system. It’s a currency that governments can tax,
manipulate, create more of than is necessary, inflate. They could
do all the things to a digital currency that they presently do with
paper currency.
Mr. Gans: That is true. I guess this is where you stand. I’m not
a libertarian and I know a lot of supporters of bitcoin are. There
are a lot of people who like to do things like transacting outside of
the government eye, and there will always be a demand for that.
That doesn’t mean there isn’t a lot of gain to a government
actually adopting new technologies transact money and other
things associated with it. It may be a completely separate deal. It
may be something for people outside the system or never want to
be a part of; so be it. That’s never going to change.
But there are a lot of transactions that occur precisely because
there is a government stamp of approval, because banks are
regulated by the government. That’s one of the hallmarks we
have, that the banks are accredited.
One of the things we’re seeing in some of these bitcoin
exchanges, which have operated outside of financial regulations,
is that they have had exactly the things occur to it that we have
those regulations for, such as basically not being secure enough,
maybe even not being secure enough with respect to the people
who are running them, but we have banks that are regulated to
ensure that doesn’t occur.
So when I say that the Bank of Canada could adopt these
things, I’m saying it from the point of view that if you are in the
business of government-sponsored currency, then there is nothing
wrong with the idea of government-sponsored crypto virtual
currency.
Senator Tkachuk: The banks are all regulated.
[Translation]
Senator Bellemare: I will ask my question in French, and then I
will repeat it in English.
My first question is about the limit of bitcoins that can be
created. We know that in the case of regular money, there is a
formula, MV = PQ — where money and velocity equal price and
quantity. In the case of bitcoins, can the velocity of money be
increased? Did you understand my question?
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Banking, Trade and Commerce
[English]
27-3-2014
[Traduction]
Mr. Gans: That’s a very astute question. If I have to pick the
question that keeps me up and thinking about this issue, it’s that
one — velocity. The quantity theory of money, that income has to
be measured in the money we measure it in, is a fundamental. It’s
not a theory, it’s a definition.
What that means is that income is generated as we pass around
the stuff, and if we pass around the stuff quicker, we can generate
more measured income. That’s enough to blow your mind right
there in terms of trying to think about what we’re doing.
Everything we do in monetary economics relies on us assuming
that that velocity stays the same. If it doesn’t stay the same, it
becomes harder to predict the relationship between the money
supply and the income generated.
If we get the situation where we have a fixed money supply but
at the same time there are things speeding it up, then we have the
same outcome as if we have an expanding money supply and
nothing speeding it up. That is definitely true.
As near as I can tell, no economist understands the velocity of
money. Nobody understands it. We don’t know. This is this limit
of the knowledge.
I’ve had people come to me who want to set up private versions
of crypto-currency, more legitimate versions of bitcoin, with the
hope of transacting better, and they get stuck at this velocity
question. I don’t have an answer for it.
One thing that’s happening with bitcoin at the moment is the
velocity is a bit limited because the transactions actually have to
be verified and that can take between 10 minutes and an hour
depending on the computing power available, so that’s limiting
the velocity right there. But the other thing that’s limiting the
velocity of bitcoin is that most people who have bitcoins are
holding on to them. They have stuffed them under their
mattresses. That also affects velocity as well. They are not using
them to transact; they’re using them to speculate; they’re using
them as an asset. All money gets used that way. That’s why we
have no great prediction of this.
I would love to come to you and say that I have thought about
this and worked it out. I haven’t. I don’t know anyone who has.
Maybe this entire episode will cause people to finally understand
it.
This is a big, big question mark — a great question mark but a
big one.
[Translation]
Senator Bellemare: My second question is about miners. I do
not quite understand the notion of ‘‘mining’’ in the money
creation process. However, I think I understand that individuals
are involved. There are people referred to as miners, who have to
solve algorithms.
27-3-2014
6:71
If I have understood correctly, the people whose job this is are
paid in bitcoins. If virtual money, digital money, was developed,
would those people be numerous? Would they replace those who
are currently working in financial institutions?
This question has more to do with the labour market. Who are
these people working behind the scenes?
[English]
[Traduction]
Mr. Gans: One of the fascinating things about bitcoin and the
way it was designed by people unknown is that they built in this
system to have more bit points created. That was the reward for
solving — and I can’t give you more of an explanation of this
because I just don’t know — complex problems in cryptography
that are related to the verification of these transactions taking
place, and they get increasingly harder all the time. They are
rewarded in bitcoins, so if bitcoins are more valuable, people will
devote more of their energy and computing resources to mining
them. If they are less valuable, they will stop. It’s great in that
way. It has a nice equilibrium.
The reason is because they are exactly like gold miners. We
have the same issue. When the gold price goes up, all of a sudden
people are running around, looking to mine gold. Even in Ontario
there are people looking for gold, because the gold price is
currently so high. When the gold price goes down, they stop. It’s
the same principle.
Actually, when you think about it, it’s just as wasteful. It’s not
clear why we go running around mining gold for monetary
purposes. Mining gold to actually use in stuff is one thing. Mining
gold to have it as currency is another. Some very bright
economists have suggested that the best thing we can do with
gold is identify where the mine is, work out where the gold is, and
just leave it there and put up a fence. This is the same issue with
bitcoins.
Is this going to replace labour? I hope not.
I think this is one of the flaws in the system. Canada currently
prints money. It issues money. It has become cheaper all the time.
We have better money now that’s plastic in nature and things like
that. If a government were to set up a crypto-currency, it wouldn’t
have this mining process. It would just have a process by which it
releases currency. In fact, because it’s a government, it would just
say, ‘‘You’re going to have to trust us.’’
If a private firm did so — and there is one in California called
Ripple Labs that has tried to do this for the purposes of
improving transactions. They won’t issue their currency. They just
said we’ll issue this much currency and that’s it. They hold some
of the currency themselves, presumably to use for the purposes of
stabilization, but also to somehow earn money from it, which
becomes problematic.
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Banking, Trade and Commerce
27-3-2014
I think that the bitcoin mining boom is an anachronism,
something built into the system. Can we do it without it? It seems
like we should be able to do it, but I don’t know the precise
mechanism by which that will occur.
Senator Greene: This has been most interesting. Up to now
we’ve been discussing the impact of bitcoin on Canada and the
United States and the established currency in countries. I’m
wondering if a Third World country could use the bitcoin as a
tool of economic development. Suppose a country in Africa or
Cuba, for example, would declare bitcoin to be its legal tender.
What kind of impact would that have on a country and on the
currency?
Mr. Gans: That’s a fascinating idea. In countries where the
currency is not stable, adopting something more stable is a good
way to go. Already the U.S. dollar is used in that method around
the world because of its stability, but it’s hard to use it
electronically in the same way. That’s where it gets really tricky.
It’s hard to have a bank account in U.S. dollars and things like
that.
A country could adopt bitcoins. The International Monetary
Fund might see this as a tool of economic development. There are
pros and cons to that. One of the pros, of course, is stability, and
allowing these transactions to take place would be terrific. The
con would be, of course, if there is any benefit at all to a country
having some control over its own currency that gets taken away.
At the moment the control isn’t there, but in the future it might be
there. Most of Europe has already ceded that control away itself
and we can argue about the pros and cons of that, but that would
be the balance being made.
At the moment there’s a sense of ‘‘it can’t hurt.’’ There’s a sense
of if somebody develops something more stable — and I don’t
think bitcoin is it yet — one suspects that that currency will get
adopted, that that will facilitate those payments in countries
where there are unstable currencies. I think that is the first impact
we’ll see, and once that spreads it will be all for the better.
The Chair: Dr. Gans, one of the things you haven’t talked
about is the illicit use of crypto-currencies. Can you comment a
little? There is a tendency when we talk of bitcoin and some of
these other digital currencies that the entire focus seems to end up
on the issue of money laundering, terrorist financing, anonymity,
et cetera. Could you comment on that whole area?
Mr. Gans: The wonderful thing — and I mean ‘‘wonderful’’ in
the sense of constraining it — about illicit use of currency is that
you lose the trust mechanism that comes from the non-illicit use
of currency. You’re right; one thing bitcoin or a crypto-currency
can solve is a way of engaging in trust. It gives you some means of
facilitating a payment, having verification of that payment taking
place, and it facilitates trust. The stereotypical version of the
27-3-2014
6:73
Swiss bank account is the right analogy here. One expects that
innovations on this front will make those transactions easier and
simpler.
At the same time, right now the way in which bitcoin works is a
very public one. As I said, in order to solve this trust issue of when
has somebody exchanged a piece of digital property, there has to
be a public ledger than anyone can look at and say, ‘‘Oh, yes, this
bit of thing has moved to this person and they can say they are
now the owner.’’ You have to see that publicly, though. Whenever
there is that possibility, there is the possibility to verify not only
the transaction itself but the entire history of transacting.
Yes, one could imagine that people engaged in illicit activities
could develop this sort of currency and do that, but ultimately in
order to give that value they have to buy goods and services and
trade wealth, and that means interacting with legitimate
economies at some point.
That barrier is going to be there for quite some time. I just
don’t see a world in which the currency takes over, everything
becomes anonymous and that works. I don’t see that occurring
because most transactions want to occur where we identify the
parties and they are happy for others to see that identity. I don’t
think that will change.
Is there some other mechanism or dire scenario whereby this
could occur? I don’t want to rule it out because you never know
with monetary things. All sorts of funny things have occurred in
the past, but I’m not fundamentally afraid of it.
The Chair: Dr. Gans, thank you very much. This concludes our
questions. On behalf of each one of the members of the Standing
Senate Committee on Banking, Trade and Commerce, we greatly
appreciate your appearance here today.
Mr. Gans: It has been my pleasure.
(The committee adjourned.)
THE REGISTERED DISABILITY
SAVINGS PLAN PROGRAM:
WHY ISN’T IT HELPING
MORE PEOPLE?
Report of the
Standing Senate Committee on Banking,
Trade and Commerce
The Honourable Irving R. Gerstein,
C.M., O.Ont., Chair
The Honourable Céline Hervieux-Payette,
P.C., Deputy Chair
March 2014
Ce rapport est aussi disponible en français
***********************
Available on the Parliamentary Internet:
www.parl.gc.ca
(Committee Business – Senate – Reports)
41st Parliament – 2nd Session
TABLE OF CONTENTS
MEMBERS ....................................................................................................................................... i
ORDER OF REFERENCE ............................................................................................................... ii
EXECUTIVE SUMMARY ............................................................................................................. iii
LIST OF RECOMMENDATIONS .................................................................................................. v
CHAPTER ONE: Introduction ........................................................................................................ 1
CHAPTER TWO: The Registered Disability Savings Plan Program ................................................ 2
A. Introduction of the Registered Disability Savings Plan Program ........................................ 2
B. Eligibility for a Registered Disability Savings Plan ............................................................ 2
C. Contributions to a Registered Disability Savings Plan ........................................................ 2
D. Payments from a Registered Disability Savings Plan ......................................................... 3
E. Recent Changes to the Registered Disability Savings Plan Program ................................... 3
CHAPTER THREE: Provincial and Territorial Legislation Regarding the Appointment of a
Legal Representative ............................................................................................................... 5
CHAPTER FOUR: Issues Raised by the Committee’s Witnesses and the Committee’s
Recommendations ................................................................................................................... 7
A. Issues of Legal Capacity and Representation...................................................................... 7
1. Proposals by the Witnesses ............................................................................................. 7
2. Recommendations by the Committee .............................................................................. 8
B. Issues of Awareness and Understanding ............................................................................ 9
1. Proposals by the Witnesses ............................................................................................. 9
2. Recommendations by the Committee .............................................................................10
C. Issues in Relation to the Withdrawal Rules .......................................................................10
1. Proposals by the Witnesses ............................................................................................10
2. Recommendations by the Committee .............................................................................11
D. Issues Relating to Administrative Requirements ...............................................................11
1. Proposals by the Witnesses ............................................................................................11
2. Recommendations by the Committee .............................................................................12
CHAPTER FIVE: Conclusion ........................................................................................................13
APPENDIX A: LETTER TO THE COMMITTEE FROM THE MINISTER OF FINANCE ......... 14
APPENDIX B: WITNESSES ........................................................................................................ 16
APPENDIX C: BRIEFS SUBMITTED TO THE COMMITTEE ................................................... 18
MEMBERS
The Honourable Irving R. Gerstein, C.M., O.Ont., Chair
The Honourable Céline Hervieux-Payette, P.C., Deputy Chair
and
The Honourable Diane Bellemare
The Honourable Douglas Black, Q.C.
The Honourable Larry W. Campbell
The Honourable Stephen Greene
The Honourable Ghislain Maltais
The Honourable Paul J. Massicotte
The Honourable Thanh Hai Ngo
The Honourable Pierrette Ringuette
The Honourable Michel Rivard
The Honourable David Tkachuk
Ex-officio members of the Committee:
The Honourable Senators Claude Carignan, P.C., (or Yonah Martin) and James S. Cowan (or
Joan Fraser).
Other Senators who have participated from time to time in the study:
The Honourable Senators JoAnne L. Buth, Michael L. MacDonald, Thomas Johnson McInnis,
Percy Mockler, Pierre Claude Nolin, Nancy Ruth and David M. Wells.
Parliamentary Information and Research Service, Library of Parliament:
Brett Stuckey and Adriane Yong, Analysts.
Clerk of the Committee:
Danielle Labonté
Senate Committees Directorate:
Brigitte Martineau, Administrative Assistant
i
ORDER OF REFERENCE
Extract from the Journals of the Senate of Tuesday, December 3, 2013:
Resuming debate on the motion of the Honourable Senator Gerstein, seconded by the
Honourable Senator LeBreton, P.C.:
That the Standing Senate Committee on Banking, Trade and Commerce be authorized
to examine and report on the ability of individuals to establish a registered disability
savings plan (RDSP), with particular emphasis on legal representation and the ability of
individuals to enter into a contract; and
That the committee submit its final report to the Senate no later than March 31, 2014,
and that the committee retain all powers necessary to publicize its findings until 180 days
after the tabling of the final report.
The question being put on the motion, it was adopted.
Gary W. O’Brien
Clerk of the Senate
ii
EXECUTIVE SUMMARY
Registered disability savings plans (RDSPs) were announced in the 2007 federal budget in
response to recommendations by the Expert Panel on Financial Security for Children with Severe
Disabilities. The objective of the RDSP program is to enable parents and others to save for the
medium- and long-term financial security of a disabled individual. On average, about 12,000
RDSPs have been established each year since the RDSP program became effective in 2008.
These 78,000 RDSPs represent an uptake rate of 15% among the approximately 500,000
disabled individuals in Canada who are eligible to establish a RDSP.
On 3 December 2013, the Standing Senate Committee on Banking, Trade and Commerce began its
study on the ability of individuals to establish a RDSP. The Committee’s witnesses suggested
various reasons for the low uptake rate in relation to the RDSP program, and offered suggestions
on ways in which this rate might be increased.
Chapter Two of this report describes the RDSP program, with a focus on eligibility criteria,
contributions to and payments from a RDSP, and recent changes to the RDSP program. Chapter
Three discusses provincial and territorial legislation regarding legal capacity and representation.
Chapter Four outlines four possible reasons for the low uptake rate in relation to the RDSP
program that were proposed by the Committee’s witnesses, and presents the Committee’s
recommendations in each area. According to the witnesses, one potential reason for the low uptake
rate is that some disabled adults may not have the legal capacity to establish a RDSP or a legal
representative to act on their behalf with respect to property. The Committee recommends that the
provinces and territories ensure that disabled adults can access the RDSP program, and that the
federal government continue to work with the provinces and territories to improve access to the
program.
The Committee was also told that there is a lack of awareness and understanding of the RDSP
program, which can affect the uptake rate. The Committee recommends that the federal
government improve its communication efforts with respect to the RDSP program. This goal
should be accomplished through such measures as ensuring that relevant information is provided
to those who qualify for the Disability Tax Credit, developing partnerships with disability
advocacy groups to facilitate the distribution of information about the program, and working
with provincial and territorial disability support offices to promote RDSPs.
A third potential reason for the low uptake rate is the rules in relation to the withdrawal of funds
from RDSPs, such as the 10-year waiting period and the assistance holdback period. The
Committee recommends that the federal government lower the 10-year waiting period to 5 years,
and reduce the amount to be repaid under the assistance holdback amount rules.
Lastly, the Committee’s witnesses identified administrative issues in relation to the RDSP
program as a possible reason for the low uptake rate. According to them, the forms are complex,
and obtaining identification and opening a deposit account in order to establish a RDSP can be
difficult. The Committee recommends that the federal government ensure that the needs of
disabled individuals wishing to establish a RDSP are met, perhaps through the establishment of a
federal initiative or the funding of federally recognized organizations that could provide
iii
assistance. As well, the Committee recommends that the government strongly consider the
possibility of having a RDSP automatically established when someone qualifies for the
Disability Tax Credit.
In Chapter Five, the Committee provides its conclusions with respect to its study of individuals’
ability to establish a RDSP.
iv
LIST OF RECOMMENDATIONS
1. The provinces and territories be urged to examine, on an expeditious basis, their
legislation with respect to legal capacity and representation to ensure that disabled adults
can access the registered disability savings plan (RDSP) program.
Moreover, the federal government should continue to work with the provinces and
territories to improve access to the program.
2. The federal government enhance its communication efforts in relation to the registered
disability savings plan (RDSP) program, including through:

ensuring that relevant information is provided, on an ongoing basis, to
taxpayers who are eligible for the Disability Tax Credit;

developing formal partnerships with disability advocacy groups in order to
ensure that all possible opportunities are taken to inform disabled individuals
about the program; and

working with provincial and territorial disability support offices to promote
the establishment of RDSPs.
3. The federal government reduce the 10-year waiting period to 5 years between the end of
federal grant and bond contributions and the time at which the beneficiary of a registered
disability savings plan (RDSP) can begin to make withdrawals from his or her plan
without having to repay a portion of these federal contributions.
Moreover, the government should reduce the amounts repaid to it under the assistance
holdback amount rules that occur in relation to withdrawals from a RDSP prior to the end
of the waiting period.
4. The federal government ensure that the needs of disabled individuals wishing to establish
a RDSP are met. This goal could be accomplished through the establishment of a federal
initiative or the funding of federally recognized organizations that could provide
assistance to such individuals. In particular, disabled individuals should be provided with
any assistance they need in procuring identification, opening a deposit account, applying
for the Disability Tax Credit and/or completing the administrative requirements to
establish a RDSP.
Finally, the government should strongly consider the possibility of having a RDSP
established automatically when an individual becomes eligible for the Disability Tax
Credit and other RDSP qualification requirements are met.
v
CHAPTER ONE: Introduction
At the request of the federal Minister of Finance, the Standing Senate Committee on Banking,
Trade and Commerce began its examination of the ability of individuals to establish a registered
disability savings plan (RDSP) on 3 December 2013, with particular emphasis on legal
representation and the ability of individuals to enter into a contract. In addition to written briefs, the
Committee heard from 16 witnesses, including Minister of State (Finance) Kevin Sorenson and
other representatives from the Department of Finance, disability advocacy groups, the legal
community, financial institutions and businesses that provide financial planning services.
Witnesses proposed various reasons for the low uptake rate in relation to the RDSP program, and
offered suggestions on ways in which this rate might be increased. Although the provincial and
territorial governments were invited to participate in the study, they declined the Committee’s
invitation to appear. The Government of Newfoundland and Labrador provided written comments
to the Committee, but these were received after the consideration of the report.
Chapter Two of this report provides some background information on the RDSP program. Chapter
Three discusses provincial and territorial legislation regarding legal capacity and representation.
Chapter Four outlines the witnesses’ proposals and the Committee’s recommendations on such
issues as:

legal capacity and representation;

awareness of the RDSP program;

withdrawal rules; and

administrative issues in relation to the program.
The Committee’s conclusions are presented in Chapter Five.
1
CHAPTER TWO: The Registered Disability Savings Plan Program
A. Introduction of the Registered Disability Savings Plan Program
Statistics Canada’s Canada Survey on Disability indicated that, in 2012, 3.8 million people – or
13.7% of Canadians aged 15 and older – reported being limited in their daily activities due to a
disability. Many of these individuals rely on provincial or territorial social assistance programs for
financial support, and these programs often have limits on the amount of assets and income that a
disabled individual can have while remaining eligible for assistance.
Pursuant to the recommendations in the 2006 report of the Expert Panel on Financial Security for
Children with Severe Disabilities, RDSPs were announced in the 2007 federal budget. The
objective of the RDSP program, administered by Employment and Social Development Canada,
is to enable parents and others to save for the medium- and long-term financial stability of a
disabled individual.
On average, about 12,000 RDSPs have been established each year since the program became
effective in 2008. These 78,000 RDSPs represent an uptake rate of 15% among the
approximately 500,000 disabled individuals in Canada who are eligible to establish a RDSP.
Since 2008, the federal government has contributed $564.5 million in grants and $235.8 million
in bonds to RDSPs.
B. Eligibility for a Registered Disability Savings Plan
The “beneficiary” of a RDSP is the disabled individual for whom the plan is established. The
beneficiary must be eligible for the federal Disability Tax Credit, be a resident of Canada, be
under the age of 60 and have a social insurance number. A “plan holder” is a person who is
eligible to establish a RDSP at a financial institution. A parent, guardian, legal representative, or
public department or agency that is legally authorized to act on behalf of a beneficiary can
establish a RDSP and be the plan holder for a beneficiary who is a child.
If a beneficiary is an adult and has the legal capacity to enter into contracts, he or she can be the
plan holder. When a beneficiary is found to be legally incompetent, a guardian, legal
representative, or a public department or agency that is legally authorized to act on behalf of that
individual can establish a RDSP for a beneficiary and be the plan holder.
When establishing a RDSP, the financial institution decides whether a disabled adult has
contractual competence. As discussed below, temporary federal measures exist to address
situations in which a disabled adult may not have contractual competence and does not have a
legal representative to act on his or her behalf with regard to property. However, these
temporary measures do not assist disabled adults without a parent, spouse or common-law
partner to act on their behalf.
C. Contributions to a Registered Disability Savings Plan
Private contributions to a RDSP, which are contributions by the beneficiary or other people, can
be made until the end of the year in which the beneficiary turns age 59, to a lifetime limit of
$200,000. Contributions by the federal government occur through the Canada Disability Savings
2
Grant and the Canada Disability Savings Bond programs. Federal contributions can be made
until the end of the year in which the beneficiary turns age 49, and unused federal grant and bond
entitlements can be carried forward for 10 years.
The amount of the federal grant provided to a beneficiary is based on family income and the
amount of private contributions made to the RDSP. For 2014, with family income of $87,907 or
less, the maximum annual grant is $3,500. For those with a family income that exceeds $87,907
in 2014, the maximum annual grant is $1,000. The maximum lifetime federal grant amount is
$70,000.
The amount of the federal bond provided to a beneficiary is based solely on family income. In 2014,
with family income of $25,584 or less, the maximum amount of the bond is $1,000. If family
income is greater than $25,584 in 2014, the amount of the bond is proportionately less than
$1,000; no bond is contributed in cases where family income exceeds $43,953. The maximum
lifetime federal bond amount is $20,000.
D. Payments from a Registered Disability Savings Plan
Although payments from a RDSP can be made at any time, there is a 10-year waiting period
between the end of federal grant and bond contributions and the time at which the beneficiary
can begin to make withdrawals from his or her RDSP without having to repay a portion of the
federal contributions. The amount that the beneficiary has to repay if the waiting period is not
met is the lesser of the total amount of federal contributions to the RDSP in the past 10 years,
which is called the “assistance holdback amount,” or $3 for every $1 withdrawn from the RDSP.
Two main types of payments can be made from a RDSP: disability assistance payments and
lifetime disability assistance payments. Disability assistance payments are withdrawals that can
be made at any time. Lifetime disability assistance payments are annual payments that must
begin by 60 years of age and that are determined by a formula in the Income Tax Act.
If the federal contributions to a RDSP exceed the contributions made by the beneficiary or other
people, the maximum annual limit for both types of payments is the greater of the amount
determined by the formula in the Income Tax Act and 10% of the fair market value of the
RDSP’s assets at the beginning of the year. If the federal contributions are less than the
contributions made by the beneficiary or other people, there is no maximum disability assistance
payment limit, but lifetime disability assistance payment amounts are determined by the Income
Tax Act’s formula. A more flexible withdrawal schedule is available if a beneficiary has a
shortened life expectancy.
E. Recent Changes to the Registered Disability Savings Plan Program
In response to the October 2011 federal review of the RDSP program, the 2012 and 2013 federal
budgets announced a number of changes designed to simplify the program. For example, the
amounts that need to be repaid to the federal government are now proportional to the amount
withdrawn from the RDSP, a registered education savings plan can be rolled over into a RDSP if
the plans have the same beneficiary, and a RDSP can remain open for up to five years when a
beneficiary becomes ineligible for the Disability Tax Credit.
3
According to temporary federal measures that are effective until the end of 2016, the definition
of “qualifying person” is expanded to allow a spouse, common-law partner or parent to establish
a RDSP for a beneficiary and be the plan holder. These measures assist an adult who may not
have the legal capacity to enter into contracts and does not have a legal representative to act on
his or her behalf with regard to property. According to these measures, a parent can continue to
be the plan holder in the event that the minor child becomes an adult and may not be legally
competent to enter into contracts.
4
CHAPTER THREE: Provincial and Territorial Legislation Regarding the
Appointment of a Legal Representative
According to the Constitution Act, “property and civil rights” are within the jurisdiction of the
provinces and territories. Thus, rules governing the legal capacity of mentally disabled adults and
the individuals who have the authority to manage the property of such adults fall within
provincial and territorial jurisdiction. To give the provinces and territories time to make any
needed legislative changes regarding legal representation for disabled adults who may not have
the legal capacity to enter into contracts, the federal government enacted temporary measures in
relation to the RDSP program.
In Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island and Nunavut, a
disabled adult who may not have contractual capacity may only be able to establish a RDSP if he
or she is declared legally incompetent and has someone named as his or her guardian or legal
representative. This approach may be costly, require the services of a lawyer, take several
months to complete and have unintended consequences for the liberty of the individual.
According to the 2013 federal budget, the governments of British Columbia, Saskatchewan,
Manitoba and Yukon have indicated that their legislation in relation to legal representation
allows a disabled adult who may not have contractual capacity to establish a RDSP.
Newfoundland and Labrador and Alberta have amended their legislation to permit named
individuals to act on behalf of disabled adults with respect to the RDSP program. Table 1
outlines the procedures in selected provinces and Yukon for the appointment of a person to
manage property on behalf of an adult with mental disabilities.
The 2014 federal budget indicated that the Northwest Territories will address the ability of a
disabled adult who may lack contractual ability to establish a RDSP on a case-by-case basis. As
well, in its 2013 provincial budget, the government of Ontario asked the Law Commission of
Ontario to examine ways in which adults with mental disabilities who may not have contractual
capacity could participate in the RDSP program.
5
Table 1 – Selected Provincial and Territorial Procedures for
the Management of Property on Behalf of Adults with Mental Disabilities,
as of February 2014
Province or Territory
British Columbia
Procedure for the Management of Property
The Representation Agreement Act allows a mentally disabled adult
to appoint a person as his or her legal representative to handle
financial decisions.
Alberta
The Adult Guardianship and Trustee Act allows trustees to have
authority over a specified financial matter, including a registered
disability savings plan (RDSP).
Saskatchewan
The Adult Guardianship and Co-decision-making Act allows a
mentally disabled adult to provide a parent or family member with a
special limited power of attorney to set up and manage a RDSP.
Manitoba
The Vulnerable Persons with a Mental Disability Act provides a
streamlined administrative proceeding for the appointment of a
substitute decision-maker for a person with a mental disability.
Newfoundland and
Labrador
Amendments to the Enduring Powers of Attorney Act allow a
mentally disabled adult to designate a legally authorized
representative to act as a plan holder for a RDSP.
Yukon
The Decision-making, Support and Protection to Adults Act allows a
mentally disabled adult to execute a “supported decision-making
agreement” that appoints a friend or relative to assist him or her
with financial matters. The Adult Protection and Decision-making
Act allows a mentally disabled adult to execute a representation
agreement that gives a representative the authority to make
decisions in relation to financial matters.
Source: Table prepared using information obtained from Law Commission of Ontario, Capacity of Adults
with Mental Disabilities and the Federal RDSP: Discussion Paper, December 2013.
6
CHAPTER FOUR: Issues Raised by the Committee’s Witnesses and the
Committee’s Recommendations
Witnesses provided the Committee with a variety of reasons that might explain the limited
participation by disabled persons in RDSPs. These reasons include:

the issue of legal capacity and representation;

a lack of awareness and understanding of the RDSP program;

issues related to the RDSP program’s withdrawal rules; and

administrative issues that make the program overly complex for some qualifying
individuals.
A. Issues of Legal Capacity and Representation
1. Proposals by the Witnesses
Witnesses highlighted legal capacity and representation as a key barrier preventing some
individuals from establishing a RDSP. The Committee was told about a national survey of
people with disabilities conducted by the Planned Lifetime Advocacy Network in 2011. About
10% of the respondents identified issues with their capacity to enter into contracts as their
primary reason for not establishing a RDSP.
Most of the disability advocacy groups that appeared before the Committee suggested that, as an
alternative to a patchwork of legislative approaches to address legal capacity and representation
in relation to RDSPs, the federal government should consider a solution that is common across
the provinces and territories. In particular, according to these groups, the federal government
could amend the Income Tax Act to introduce a RDSP-specific form, perhaps based on British
Columbia’s representation agreements. The form could authorize the appointment of a person
related to, or in a trusting relationship with, the beneficiary to be a joint plan holder of the RDSP.
To guard against potential abuse, the trusting relationship would have to be confirmed by a third
party.
Regarding constitutional concerns in relation to such a federal form, witnesses favouring a
common solution argued that any intrusion into the provincial and territorial jurisdiction
regarding property and civil rights would be very limited. They also indicated that the intrusion
would be needed to remove any disparities across the country in the administration of the RDSP
program. As well, according to them, such a form would not affect the authority of the provinces
and territories to enact legislation regarding legal capacity and representation in relation to the
RDSP program.
Some witnesses expressed reservations about a federal form of the nature described above. The
Ottawa Branch of the Canadian Mental Health Association noted that some disabled individuals,
particularly those with mental disabilities who are estranged from their family or who do not
have close friends, would experience challenges in appointing a person to be a joint plan holder.
7
The Canadian Imperial Bank of Commerce was concerned that a common solution may not
capture all of the disabled adults who do not have contractual capacity.
Goddard Gamage Stephens LLP raised questions about the federal form suggested by other
witnesses. These questions were in relation to the entity that would evaluate the completed form,
the nature and scope of the evaluation, and – in the event that a lawyer was required – the
relative extents to which the beneficiary and the appointed representative would provide
instructions to the lawyer. As well, it argued that, if a simpler method for appointing a
representative were to be adopted by the federal, provincial or territorial governments, then there
would be fewer safeguards in place and disabled individuals could be at a higher risk of abuse by
those who would act as a plan holder.
The British Columbia Law Institute indicated that, while British Columbia’s representation
agreement was a good idea in theory, the reality is that these agreements are used to a very
limited extent because of uncertainty about whether RDSPs are included under British
Columbia’s Representation Agreement Act; RDSPs are not listed in the regulations to the Act.
The Law Commission of Ontario shared with the Committee the nine options it is considering
for the appointment of a legal representative for the purposes of establishing a RDSP. Four of the
options would allow a disabled adult to name someone as his or her legal representative, with
each option having a different definition for legal capacity. The other options, which would
involve an external appointment process initiated by a family member or another adult, would
require a streamlined application to a court, tribunal or government office in order to name
someone as legal representative. The Law Commission indicated that it has not yet formulated
the recommendations that it will make to the Government of Ontario.
Some witnesses representing the legal community and the financial sector supported a federal
solution but did not specifically endorse the federal form proposed by other witnesses. The Bank
of Montreal Global Asset Management asserted that, in order to ensure that the RDSP program is
administered consistently across the country, a federal framework or template, along with
provincial and territorial cooperation, would be required to address the issues with legal capacity
and representation in relation to the RDSP program. Goddard Gamage Stephens LLP highlighted
the increasingly mobile nature of Canada’s population as a reason for a common solution.
Regarding the temporary federal measures that are effective until 2016, Mackenzie Investments
suggested that the definition of the terms “qualified family member,” “qualified person” and
“contractually competent” in the Income Tax Act should be clarified, perhaps to include other
family members, community groups or provincial government agencies as plan holders.
Finally, the Credit Union Central of Canada mentioned that the ability to appoint a secondary
plan holder would be helpful if the parent, spouse or common-law partner passed away or were
unable to manage the RDSP.
2. Recommendations by the Committee
The Committee acknowledges that a common solution to the issue of legal capacity and
representation in relation to the RDSP program would have benefits for both disabled individuals
and the financial sector. However, as no information was received directly from any of the
8
provincial or territorial governments before the Committee adopted the report, it is unable to
examine fully the effectiveness of the provincial and territorial procedures for the legal
representation of disabled adults that are currently in place. Furthermore, differences among the
legal frameworks of the provinces and territories in relation to legal capacity and representation
exist in part because of the civil law system in Quebec and the common law system in the other
jurisdictions. Consequently, the Committee is not certain that a federal form of the type
described by some of the witnesses would resolve the problem with legal capacity and
representation in relation to the RDSP program. Moreover, such a form could have the practical
effect of introducing another source of complexity into a program that is already somewhat
complex. Finally, the Committee is aware that even limited encroachment into provincial and
territorial jurisdiction could result in a constitutional challenge.
The Committee notes that eight of Canada’s provinces and territories already have a procedure in
place, or are actively considering changes to their legislative frameworks, regarding legal
capacity and representation. The Committee urges those provinces and territories that have yet to
examine their legislation with respect to legal capacity and representation to do so quickly. If the
temporary federal measures for legal capacity and representation in relation to the RDSP
program expire before all provinces and territories have implemented changes to their legislative
frameworks, the Committee is of the view that the federal government should study two options:
the feasibility of other proposals to ensure access to the RDSP program, and the possibility of
extending the existing temporary measures.
From that perspective, the Committee recommends that:
The provinces and territories be urged to examine, on an expeditious basis, their
legislation with respect to legal capacity and representation to ensure that
disabled adults can access the registered disability savings plan (RDSP)
program.
Moreover, the federal government should continue to work with the provinces
and territories to improve access to the program.
B. Issues of Awareness and Understanding
1. Proposals by the Witnesses
Several of the Committee’s witnesses stated that one of the most significant reasons that the
RDSP program is not being used to the fullest extent possible is that individuals are unaware of
the program. Mackenzie Investments noted that many disabled individuals have not applied for
the Disability Tax Credit, while other witnesses remarked that some of those who are eligible for
the Disability Tax Credit are unaware of the RDSP program. The Desjardins Group pointed out
that, given privacy issues in relation to health information, it is difficult for financial institutions
to identify the individuals to whom information regarding RDSPs should be made available.
Some witnesses proposed that doctors who prepare the Disability Tax Credit form for disabled
patients and others who have contact with disabled individuals, such as social workers and
community living centre representatives, should inform the disabled individual about the RDSP
9
program. Also, Assante Capital Management Ltd. suggested that Canadian tax preparation
software could play a role; in particular, if a taxpayer indicates that he or she is claiming the
Disability Tax Credit, information could be provided regarding the establishment of a RDSP.
Representatives of financial institutions stated that the banking sector is promoting the RDSP
program through various online and social media outlets, outreach to community organizations,
and the preparation of educational materials and seminars, including a RDSP backgrounder.
In its written submission to the Committee, Employment and Social Development Canada noted
that its Office for Disability Issues has undertaken a number of initiatives designed to create
awareness and understanding of the RDSP program. These initiatives include: establishing
contracts with non-governmental organizations to provide group information sessions; setting up
information booths at national and regional conferences and events held by disability
organizations, professional associations and medical associations; collaborating with provincial
and territorial governments to promote the RDSP program in their jurisdictions; and mailing
information about the RDSP program to individuals who have recently qualified for the
Disability Tax Credit.
2. Recommendations by the Committee
The Committee recognizes that the uptake rate in relation to the RDSP program might be
improved if more individuals who are eligible for the Disability Tax Credit are aware of the
program’s existence and benefits.
Believing that a variety of actions could be taken to increase awareness and understanding of the
program, as well as of its requirements, the Committee recommends that:
The federal government enhance its communication efforts in relation to the
registered disability savings plan (RDSP) program, including through:

ensuring that relevant information is provided, on an ongoing basis, to
taxpayers who are eligible for the Disability Tax Credit;

developing formal partnerships with disability advocacy groups in order
to ensure that all possible opportunities are taken to inform disabled
individuals about the program; and

working with provincial and territorial disability support offices to
promote the establishment of RDSPs.
C. Issues in Relation to the Withdrawal Rules
1. Proposals by the Witnesses
Some of the Committee’s witnesses stated that the rules in relation to the withdrawal of funds
from a RDSP result in some disabled individuals choosing not to establish a plan. According to
them, the 10-year waiting period decreases the usefulness of a RDSP if the individual has a
10
reduced life expectancy or is already close to the age of 60. In their view, the waiting period
should be reduced. That said, other witnesses stated that, as the intent of the RDSP program is to
save for a disabled individual’s later years, reducing the 10-year waiting period could potentially
violate the intent of the program. A number of witnesses noted that exceptions to the 10-year
waiting period are possible in cases where a medical practitioner deems life expectancy to be
short.
Although witnesses discussed the possibility of different waiting periods for different disabilities,
they noted that the RDSP program is already administratively complex; adding to the existing
complexity may not be desirable.
Finally, the Desjardins Group suggested that amounts that are required to be repaid because of
the assistance holdback rules should be reduced.
2. Recommendations by the Committee
The Committee understands the difficulties that a disabled individual – and his or her family and
friends, among others – may encounter in planning to meet future financial needs. The
withdrawal rules in relation to the RDSP program, such as the 10-year waiting period and the
assistance holdback amount rules, may reduce the usefulness of the program in cases where the
disability may potentially decrease the individual’s life expectancy or where the disabled
individual is already close to the age of 60. Despite the changes made by the federal government
in the 2012 federal budget to lower the amounts required to be repaid when withdrawals occur
before the end of the waiting period, the Committee is of the view that the federal government
should consider amendments to the withdrawal rules in order to make the RDSP program more
attractive for these disabled individuals. Therefore, the Committee recommends that:
The federal government reduce the 10-year waiting period to 5 years between
the end of federal grant and bond contributions and the time at which the
beneficiary of a registered disability savings plan (RDSP) can begin to make
withdrawals from his or her plan without having to repay a portion of these
federal contributions.
Moreover, the government should reduce the amounts repaid to it under the
assistance holdback amount rules that occur in relation to withdrawals from a
RDSP prior to the end of the waiting period.
D. Issues Relating to Administrative Requirements
1. Proposals by the Witnesses
According to some of the Committee’s witnesses, certain administrative issues in relation to the
RDSP program result in some disabled individuals being unable to establish a RDSP. For
example, the Ottawa Branch of the Canadian Mental Health Association commented on the
requirement that a disabled individual must be eligible for the Disability Tax Credit in order to
establish a RDSP. It highlighted the complexity of the Disability Tax Credit forms that must be
completed by the disabled individual and the medical practitioner. According to it, forms are
11
often not completed properly, especially in the case of mental illness, which results in eligibility
for the Disability Tax Credit being denied, and – consequently – an inability to establish a RDSP.
Witnesses representing financial institutions also commented on the forms that must be filed
with Employment and Social Development Canada. They indicated that although tax preparers
may act on behalf of a client when dealing with the Canada Revenue Agency, the same is not
true with respect to financial advisors and Employment and Social Development Canada.
According to them, when a RDSP application is denied due to errors in filling out the forms,
such as an incorrect social insurance number, the financial advisor cannot resolve the issue.
Furthermore, the disabled individual, who may have a disability that makes such administrative
tasks difficult to carry out, must deal directly with Employment and Social Development
Canada.
As well, the Committee was told that the steps involved in establishing a RDSP, such as
obtaining identification and opening a deposit account, are often challenging for disabled
individuals. The Ottawa Branch of the Canadian Mental Health Association said that such
administrative tasks are difficult for individuals with mental disabilities. The British Columbia
Law Institute suggested that it might be easiest for disabled individuals to access the RDSP
program if a plan was automatically established for these individuals when they qualify for the
Disability Tax Credit.
2. Recommendations by the Committee
The Committee recognizes that the administrative tasks involved in establishing a RDSP may
sometimes be difficult, especially for disabled individuals. Therefore, the Committee is of the
view that federal efforts should be directed to reducing the administrative burden imposed on
disabled individuals who wish to establish a RDSP. The Committee is convinced that ensuring
that disabled individuals receive the help that they require to establish and contribute to a RDSP,
as well as automatic establishment of a RDSP when eligibility requirements in relation to the
Disability Tax Credit are met, would be beneficial for disabled individuals. For these reasons, the
Committee recommends that:
The federal government ensure that the needs of disabled individuals wishing to
establish a RDSP are met. This goal could be accomplished through the
establishment of a federal initiative or the funding of federally recognized
organizations that could provide assistance to such individuals. In particular,
disabled individuals should be provided with any assistance they need in
procuring identification, opening a deposit account, applying for the Disability
Tax Credit and/or completing the administrative requirements to establish a
RDSP.
Finally, the government should strongly consider the possibility of having a
RDSP established automatically when an individual becomes eligible for the
Disability Tax Credit and other RDSP qualification requirements are met.
12
CHAPTER FIVE: Conclusion
Having completed the study of the ability of individuals to establish a registered disability savings
plan (RDSP), the Committee has concluded that the low uptake rate may be partly due to the
issue of legal capacity and representation and the inability of disabled adults who may not have
legal capacity to enter into contracts to establish a RDSP. Another possible explanation for the
low uptake rate is a lack of awareness and understanding of the RDSP program among disabled
individuals and those who assist them in their financial decision making.
The Committee also recognizes that the rules in relation to the ability of RDSP beneficiaries to
withdraw funds without the requirement to repay a portion of the grants and bonds may
discourage some individuals from opening a RDSP. Finally, the Committee appreciates that there
may be a number of administrative issues in relation to the RDSP program that are preventing
some disabled individuals from establishing a plan.
It is within this context that the Committee has made recommendations that, once implemented,
would likely increase the program’s uptake rate. Such an increase would have benefits for
disabled individuals, and also for the rest of society as these individuals and others are able to
improve their long-term financial stability.
The Committee looks forward to any proposed changes that the provincial, territorial or federal
governments may make with respect to the RDSP program in the future.
13
APPENDIX A: LETTER TO THE COMMITTEE FROM THE MINISTER
OF FINANCE
14
15
APPENDIX B: WITNESSES
Organization
Name, Title
Department of Finance
The Honourable Kevin
Sorenson, P.C., M.P.,
Minister of State (Finance)
Miodrag Jovanovic, Director,
Personal Income Tax, Tax
Policy Branch
Lesley Taylor, Chief, Social
Tax Policy, Tax Policy
Branch
Tim Ames, Executive
Director
Joel Crocker, Director, Policy
and Planning
Vangelis Nikias, Project
Manager, Convention on the
Rights of Persons with
Disabilities
Brendon D. Pooran, Lawyer,
PooranLaw Professional
Corporation
Department of Finance
Department of Finance
Planned Lifetime
Advocacy Network
Planned Lifetime
Advocacy Network
Council of Canadians
with Disabilities
Council of Canadians
with Disabilities and
Canadian Association for
Community Living
Canadian Bankers
Association
Canadian Bankers
Association
Canadian Imperial Bank
of Commerce (CIBC)
BMO Global Asset
Management
Canadian Mental Health
Association, Ottawa
Branch
Canadian Mental Health
Association, Ottawa
Branch
Canadian National
Institute for the Blind
Date of
Appearance
2013-12-04
Committee
Issue No.
3
2013-12-04
3
2013-12-04
3
2013-12-11
3
2013-12-11
3
2013-12-11
3
2013-12-11
3
Darren Hannah, Director
2013-12-12
3
Randy Hopkins, Advisor
2013-12-12
3
Ann Elise Alexander, Senior
Counsel
Trevor Philp, Manager,
Registered Products and
Managed Solutions
Karen Nelson, President
2013-12-12
3
2013-12-12
3
2014-01-29
4
Tim Simboli, Executive
Director
2014-01-29
4
Marc Workman, National
Manager of Advocacy
2014-01-29
4
16
Organization
Name, Title
Mackenzie Investments
Carol Bezaire, VicePresident, Tax and Estates
Advisory Services
Sophie Dagneau, Manager,
Operations Services
Trevor Marsh, Financial
Advisor
Jean Sylvain, Chief of
Product Line, Specialized
Investment Product Line
Management Department
Ryan Fontaine, Senior
Wealth Consultant,
Assiniboine Credit Union
Anna Hardy, Regulatory
Affairs Regional Director,
Central 1 Credit Union
Sébastien G. Desmarais,
Lawyer, Tierney Stauffer
LLP
Nimali Gamage, Partner
Mackenzie Investments
Assante Capital
Management Ltd.
Desjardins Group
Credit Union Central of
Canada
Credit Union Central of
Canada
As an individual
Goddard Gamage
Stephens LLP
Law Commission of
Ontario
Law Commission of
Ontario
British Columbia Law
Institute
Adam Dodek, Member,
Board of Governors
Sarah Mason-Case, Research
Lawyer
Laura Tamblyn Watts, Senior
Fellow, Canadian Centre for
Elder Law
17
Date of
Appearance
2014-01-30
Committee
Issue No.
4
2014-01-30
4
2014-01-30
4
2014-02-05
5
2014-02-06
5
2014-02-06
5
2014-02-12
5
2014-02-12
5
2014-02-12
5
2014-02-12
5
2014-02-12
5
APPENDIX C: BRIEFS SUBMITTED TO THE COMMITTEE
Employment and Social Development Canada
(2014-01-17)
Association de planification fiscale et financière (APFF)
(2014-02-03)
Planned Lifetime Advocacy Networks (PLAN)
(2013-12-11)
Government of Newfoundland and Labrador, Department of Advanced Education and Skills
(letter dated 2014-03-04 and received 2014-03-17)
18
LE RÉGIME ENREGISTRÉ
D’ÉPARGNE-INVALIDITÉ :
POURQUOI N’EST-IL PAS
PLUS UTILE?
Mars 2014
i
ii
iv


v



1
4
5
Alberta
Saskatchewan
Manitoba
Yukon
6



8

10

11
13
14
ANNEXE A : LETTRE DU MINISTRE DES FINANCES AU COMITÉ
15
16
ANNEXE B : LISTE DES TÉMOINS
Organisation
Nom, titre
2013-12-04
2013-12-04
3
2013-12-04
3
2013-12-11
3
2013-12-11
3
2013-12-11
3
2013-12-11
3
Darren Hannah, directeur
2013-12-12
3
Randy Hopkins, conseiller
2013-12-12
3
2013-12-12
3
2013-12-12
3
2014-01-29
4
2014-01-29
4
Planned Lifetime Advocacy
Network
Planned Lifetime Advocacy
Network
Conseil des Canadiens avec
déficiences
17
Organisation
Nom, titre
2014-01-29
2014-01-30
4
2014-01-30
4
2014-01-30
4
2014-02-05
5
2014-02-06
5
2014-02-06
5
2014-02-12
5
2014-02-12
5
2014-02-12
5
2014-02-12
5
2014-02-12
5
Placements Mackenzie
Assante Capital Management
Ltd.
Mouvement Desjardins
18
19
WITNESSES
TÉMOINS
Wednesday, March 26, 2014
Le mercredi 26 mars 2014
Department of Finance Canada:
David Murchison, Director, Financial Sector Division;
Rachel Grasham, Chief, Financial Crimes - Domestic, Financial
Sector Division;
David Karp, Economist, Financial Crimes - Domestic, Financial
Sector Division.
Thursday, March 27, 2014
Le jeudi 27 mars 2014
As individuals: (by video conference):
Warren E. Weber, Economist;
Warren E. Weber, économiste;
Joshua S. Gans, Professor and Area Coordinator of Strategic
Management at Rotman School of Management, University of
Toronto.
Available on the Internet: http://www.parl.gc.ca
Disponible sur internet: http://www.parl.gc.ca
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