Finance Committee on March 19th, 2018

[The Chair, Liberal, Wayne Easter]

We'll reconvene and go in public now after our previous in camera session. We're still looking at a statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

We have two witnesses. From Académie Bitcoin, we have Mr. Jonathan Hamel, president. We also have, as an individual, Mr. Shahin Mirkhan, broker of record for Max Realty Solutions Ltd.

Gentlemen, thank you very much for coming. As the clerk made you aware, we're doing this study on money laundering and terrorism financing.

The floor is yours. I believe each of you has a presentation to start with.

Go ahead, Mr. Mirkhan. We'll start with you.

[Shahin Mirkhan, Broker of Record, Max Realty Solutions Ltd., As an Individual]

Thank you for inviting me.

With the name of love, Happy Nowruz.

Honourable Mr. Chair, members of the House, good afternoon, bonjour. It's a great pleasure and honour for me to be at the Canadian Parliament, in one of the most democratic countries in the world.

I would like to wish each and every one of you a happy and full of love Persian New Year, the beginning of spring, which is tomorrow.

To begin with, I would like to thank the Canadian judiciary system that provides its independence and proves its independence again and again. Without it, fairness and justice would not be served, although I was up against two of the most reputable government lawyers paid for by taxes, and they were right that I was an easy kill for them, but not on Canadian lands, thank God.

Second, I appreciate the Canadian lawmakers who have landed FINTRAC to protect us Canadians and to make sure we do not let any terrorists or their dirty, bloody money laundering into our society and economy. I believe it is a fantastic law to protect us Canadians.

This is the short story of what happened.

I received my real estate licence in 1989 and achieved my real estate broker licence around 2003. After working full-time in real estate for a number of years, and having good publicity in my surrounding communities, I decided to open my brokerage, which was the first Korean-Persian-Canadian real estate company in Canada. At the time my goal was to train new immigrants in this field, and I was trying to attract investors into Canada, which I did. I attracted a lot of good, clean dollars to Canada. In the end, I made a decent living for me and my family.

Up to 2009, I had trained about 188 brokers and agents, some of whom were collecting social services assistance from the government. At that time I sold my house and bought a building from which I was conducting my business.

A couple of months after the FINTRAC law came into effect for real estate brokerages, I was visited by two government employees from FINTRAC. After going through our paperwork, she told me that as a broker of record, I was in part responsible for catching anybody who looks like a terrorist. I looked at her assistant and asked her, “Does she look like one?” She got upset. A few days later I was served with a $33,750 penalty—yes, a $33,750 penalty. After I complained about the fine, it was reduced to $27,000. Of course, my letter was very nice to them. Otherwise, if not, it would have gone up or had no reduction.

On the other hand, I had to be careful when I was mailing it so it wasn't received on Monday, because they might be upset that it was a Monday.

The name “money laundering and terrorist activities” was so scary that the Real Estate Council of Ontario, RECO, decided not to renew my broker's licence, and it was put on caution for four years. I lost my agents. I could not recruit any new agents. Eventually, I lost my business and the new house for my business; I lost my office.

My only question is for the government, which is responsible for executing the law. A police officer has to go through months and months of training in order to execute the law, knowing that any mistake made by them may destroy someone's life. There are government regulatory bodies to monitor them to correct any mistakes made by them. If the money laundering and terrorist activity law is important, which I think it is, what type of training is FINTRAC offering to its employees to give them the tools to destroy a lot of people's financial lives? Whether intentionally or unintentionally they do anything wrong, besides hiring a lawyer and spending a lot of money, which we don't know where to get, who can we take our complaints to? What type of training was FINTRAC giving to real estate brokerages to identify terrorists?

At the end, with all due respect to the members of the House and my dear and favourite Prime Minister Trudeau, I'm sure you will soon notify FINTRAC about the presence of Mahmoud Reza Khavari in Canada. The man has admitted to billions and billions of dollars in money laundering for the Iranian government, for harbouring terrorists in Lebanon, Palestine, and Yemen, and the list goes on and on and on.

In fact, all these achievements for the most terrorist activities in the world are on YouTube for everyone to see. I'm sure, Mr. Chair, that you will soon direct FINTRAC to pursue the yearly demonstration by Hezbollah on Yonge Street and Finch Avenue in North York last year, where they were carrying black flags with Arabic words on them. Does that look familiar?

The major Canadian banks are the account holders of millions and billions of dollars of their money. I'm sure you will direct FINTRAC to check out the Iranian government officials who have dual citizenship in Canada. They are achieving money laundering to Canada from Dubai, Europe, and everywhere else. At the end, my dear Mr. Chair and the government, who is responsible for my losses now?

Thank you very much for giving me this time.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Mirkhan.

Mr. Hamel, the floor is yours.

[Jonathan Hamel, President, Académie Bitcoin]

Thank you.

Mr. Chairman, members of the committee, I am honoured to be invited to this chamber as the president of Bitcoin Academy, a consulting firm specializing in public blockchain technologies, such as Bitcoin. We advise and educate businesses, institutions, governments, law enforcement, and regulators.

From the outset, I would like to specify that my testimony will refer only to Bitcoin, the unit of exchange, and point-to-point payment technology.

It is important to distinguish between Bitcoin and the various other cryptocurrencies in circulation. Bitcoin is considered by the industry and the North American regulators to be a commodity-like asset, such as gold, and to have currency-specific properties, such as divisibility, liquidity, transactability, and fungibility. But let's be clear: Bitcoin it not a currency. Bitcoin is also not a security. Some other cryptocurrencies, like Ether, are more like securities, and the regulators are currently paying close attention. Other cryptocurrencies are downright scams, like Bcash. You heard a lot about Bitcoin —we're going to the moon, and there will be free Lambos for everybody—but despite the seeming lightness of Internet discussions and memes, Bitcoin is a serious industry that is developing at a fast pace in Canada despite the lack of institutional support.

The emerging blockchain technology sector powered by Bitcoin is currently attracting bright people from traditional finance, capital markets, and information technology sectors across the country. Hundreds of millions are invested from coast to coast by daring companies, who see Canada as fertile ground for developing this technology. For example, Coinsquare, a Canadian cryptocurrency exchange, has just raised $30 million and wants to hire more than a hundred people in the heart of Toronto. Bitfarms, a publicly traded blockchain infrastructure company in Quebec, has just announced a $250-million investment in Sherbrooke, one of Quebec's largest private technology investments so far. The project will take advantage of the energy surplus of local producer Hydro-Sherbrooke, enrich the community, and create 250 local jobs. The Royal Bank of Canada, RBC, recently filed a patent application for technology to make credit information data more transparent and efficient using the blockchain. The benefits and potential of blockchain technology, which is widely discussed in the media, are not possible without Bitcoin. I'm going to repeat that for the record. Blockchain does not work without Bitcoin.

Bitcoin also got a whole generation interested in market principles, finance, technology, and the economy in general. To quote Mr. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, “We owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balanced response, and not a dismissive one.”

Now, on the essence of the law that concerns this hearing, I would like to remind you that at its basis, Bitcoin is a decentralized technology that allows voluntary exchange between individuals, which in itself is a peaceful principle and creator of prosperity in society. It is important to remember that most actors in the Bitcoin industry are actively collaborating with law enforcement, governments, and regulators, whether for educational purposes or in the development of a favourable and adequate legal framework for the development of this technology. The Canadian Senate dealt with these issues in 2014, and it is largely due to the wait-and-see attitude of the government regulators and law enforcement agencies that the blockchain industry in Canada has emerged.

It is important to realize that cryptocurrencies and public blockchain technologies are global phenomena and that actors and capital are mobile. States are currently competing to attract major actors to a future economy that could reach nearly $10 trillion by 2020 according to RBC Capital Markets.

Let's now address some preconceived ideas about Bitcoin.

One, Bitcoin is not regulated. Bitcoin, like any means of exchange that can be used in society, falls under the aegis of various Canadian laws against fraud, money laundering, tax evasion, and theft. Using Bitcoin does not exempt you from the existing legal framework in Canada.

Two, Bitcoin is anonymous. Bitcoin is pseudo-anonymous and not anonymous. The system is open and transparent to easily trade like cash, but each transaction is auditable and traceable in the blockchain. I don't know how criminal networks really work, but I'm pretty sure archiving their transactions immutably and publicly on the safest database in the world is not a good idea. Additionally, peripheral players, such as exchanges, require customers to identify themselves through a KYC, “know your customer”, process.

Three, Bitcoin is used for money laundering and terrorist financing. In reality, the use of Bitcoin for illicit activities is minimal. A recent study by the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance states that “less than one percent” of transactions in the Bitcoin network are linked to illicit activities. At the recent hearings of Bill S.1241 at the U.S. Senate, Jennifer Fowler, deputy assistant secretary for the Office of Terrorist Financing and Financial Crimes at the U.S. Department of the Treasury, stated, “Although virtual currencies are used for illicit transactions, the volume is small compared to the volume of illicit activity [via ] traditional financial services.”

In conclusion, peripheral actors, such as exchanges, are able to deploy the security protocols required by the current law against money laundering and the financing of terrorist activities. It is not necessary to adopt Bitcoin- and cryptocurrency-specific regulation. Canada is currently one of the most friendly places for the development of blockchain technology. Excessive regulation could challenge hundreds of millions of dollars in investment and kill an infant industry.

Let me end with a quote from the Austrian economist and philosopher Ludwig von Mises: “Innovation is the whim of an elite before it becomes a need of the public.”

Thank you for your attention. I am available to answer your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Jonathan.

We will go to five-minutes rounds, starting with Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Welcome.

On Bitcoin, Jonathan, do we need regulation?

[Jonathan Hamel]

I think the current legal framework pretty much covers any means of exchange. I don't think we need a Bitcoin-specific regulation. As I said, Bitcoin in itself is not regulated, but the peripheral actors you use as a customer to enter or exit the network are licensed as money service businesses. With those companies, you are obligated to show your identity to transact. They hold the records of pretty much all the transactions. I don't think we need additional regulation in the current legal framework in Canada.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

From what I have read, I would probably disagree with that comment. A lot of the money services businesses, Money Mart or something like that, are regulated on a provincial basis, not on a federal basis, if I'm not mistaken, so you would need some oversight from the federal regulatory framework. In terms of, say, a “know your customer” role, that's completely different from just presenting your photo ID and proving your identity. That's my comment there.

What are the disclosure requirements for people who are participating in the Bitcoin market?

[Jonathan Hamel]

Some of the major exchanges—Coinsquare and Coinbase, for example—use third party services to authenticate the customers. I would say that most of them use a KYC process that is on par with such traditional finance actors as banks or insurance. I would say it's pretty solid as a mechanism.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Just to veer a little bit, obviously your exposure to this is much more than that of a member of Parliament's. In terms of financial innovation, where in your view is Bitcoin and Bitcoin technology—underlined by blockchain, if I understand that correctly—taking the Canadian financial sector and, for that matter, the worldwide financial sector?

[Jonathan Hamel]

As I said in my presentation, it's a misconception that we can have blockchain technologies without a native cryptocurrency like Bitcoin, because it's really the incentive that makes the system work. A real and revolutionary process that will be developed on blockchain technology really needs public blockchains like Bitcoin, for example. I don't think we can have one or the other. Both are needed to foster innovation.

We see many interesting use cases. For example, in the supply chain industry—where we can trace the authenticity of drugs in emerging markets, or whether it's for capital markets to move funds—hundreds of millions of dollars, probably billions of dollars, could be saved for companies in Canada on an annual basis.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

It's my understanding that one of the advantages of using Bitcoin technology is that the data integrity, or the security of the actual transaction, is very high. Is that correct?

[Jonathan Hamel]

Yes, that's very correct. In terms of security, Bitcoin uses the same cryptographic algorithms that standard Internet protocols do, which is 256-bit encryption. You have as a good a chance to crack just one Bitcoin account as you do of guessing the winning combination for the Powerball lottery nine times in a row. It's pretty solid as a technology.

Storing data on a public blockchain like Bitcoin is enforced through a mechanism we call “proof of work” mining. This is why: Bitcoin mining is essential to store and enforce the authenticity of data. That's why to develop what I would say is a revolutionary mechanism built on blockchain, you need mining, and you need actors such as Bitfarms, which is in Quebec.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Just to finish off that comment about the security integrity, that's why on the flip side you would need a robust oversight. If individuals, organizations, or enterprises are using Bitcoin technology for something that we would not want them to use it for, whether it's terrorist financing, say, or money laundering and so forth, you would need the authorities to have the proper tools, oversight, and robustness within the system to be able to obtain the data they would need to use or to look at the transaction. That's what I would argue for: to have that robust oversight and regulatory oversight for that system.

[Jonathan Hamel]

On the data itself, some of the most interesting use cases will rely on the open and transparent nature of the blockchain to read data in an open way, but in terms of access, you cannot crack modern cryptography. I don't think the Government of Canada can.

Nobody in the world can crack modern encryption, and Bitcoin is no different. You probably saw the authorities in the U.S., for example, trying to unlock the phones of criminals. It's the same principle here. Modern and strong encryption is essential for individual liberties.

[The Chair, Liberal, Wayne Easter]

Thank you.

I have a dumb question. Where does Bitcoin reside?

[Jonathan Hamel]

Physically?

[The Chair, Liberal, Wayne Easter]

Yes. I have difficulty understanding something I can't touch. I like to able to touch a dollar bill. Well, we can't do that anymore either—

[Voices]

Oh, oh!

[The Chair, Liberal, Wayne Easter]

—so I'll say a five-dollar bill. Explain that to me.

[Jonathan Hamel]

Yes. One of the big misconceptions we have about Bitcoin is that most of the articles we read always display the physical coin, but there are not many of these coins around. The coins are just an abstraction.

Bitcoin—the network—is what we call the “peer-to-peer network”. Instead of having a centralized server—for example, Google or Microsoft—it's a network of thousands of computers that are all connected. That's why the network is safe and is also immune to political censure: you cannot physically pinpoint all the locations of the network.

Speaking of that, the locations of the Bitcoin are stored on what we call the “blockchain”, which is the open public ledger. Think of an accounting ledger. All the Bitcoin transactions since day one have been stored on that open database, stored on thousands of computers across the world. One of the major properties of that network is that all the transactions are completely open and transparent for audit. That's a new paradigm. Of course, public finance could benefit from that.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

I'd like to thank both our witnesses for being here today and for sharing some of their understanding of FINTRAC as well as the general systems we are dealing with. Obviously this review has important perspectives that need to be heard.

I'll start with you, Mr. Hamel. This seems to me to be more a question of regulators' unfamiliarity with Bitcoin and blockchain. It sounds to me like there are a number of ways to verify and whatnot. Do you think it's just a matter of the regulators understanding this technology better?

[Jonathan Hamel]

Absolutely, and that's why we see organizations such as Coin Center in the U.S., for example, based in D.C., that are actively educating regulators. We saw recently with the hearings at the U.S. Senate that most regulators, such as the SEC and the CFTC, are mostly open in adopting a wait-and-see approach, because the technology is still in its infancy. There's a lot of media coverage about Bitcoin, but it's still small as an asset class. It's less than $500 billion. I would say that the media coverage we see is disproportionate related to the total size of the asset.

For regulators, I would say that there's definitely a strong interest from the Bitcoin community to educate and to participate with the regulators. For example, I'm sitting on the fintech committee at l'Autorité des marchés financiers, the Quebec regulators, and it is talking about cryptocurrency and other FINTRAC subjects. There is, I would say, a strong interest. There's an appeal to the community to participate and collaborate with regulators and with law enforcement such as FINTRAC, for example.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

When the public looks at it—and obviously technology comes in different spurts and starts, and as you mentioned earlier there are different cryptocurrencies out there—is this an example of how Bitcoin itself and other related technology should be the starting point for Canadian regulators to look at as an example that they can work with? There seems to be a lot more adoption of it than of some of these other cryptocurrencies.